Question: Please help with the question below. 3. (25) .Consider the model of demand externalities and multiple equilibria of Diamond (1982). a. The welfare maximization problem
Please help with the question below.

3. (25) .Consider the model of demand externalities and multiple equilibria of Diamond (1982). a. The welfare maximization problem is W* = max R,e -(1 - e)n So cF'(c) de + ex(e)v, s.t. ex(e) = (1 - e)nF(R) Write down the Lagrangean L associated with the above problem, using / to denote the Lagrange multiplier. . b. The optimality conditions for the maximization problem are dc dR 0, dc de = 0, dc du = 0. Take the derivatives of the Lagrangean with respect to R, e and M. c. Use the optimality conditions to characterize the solution to the welfare maximization problem in terms of 2 equations in the 2 unkowns R and e. d. Write down the equilibrium conditions for R and e at B = 1. Where is the difference between the condi- tions for efficiency and the conditions for equilibrium? What are the consequences of this difference
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
