Tom and Jerry are the only members of society. The table above shows their margi
ID: 1194969 • Letter: T
Question
Tom and Jerry are the only members of society. The table above shows their marginal benefits from defense satellites. If the marginal cost of a satellite is $54, the efficient quantity of satellites is
2.
3.
0.
1.
The table above gives the total benefit and total cost of producing missiles, a public good. What is the efficient number of missiles to be produced?
4 missiles
2 missiles
3 missiles
1 missile
Quantity(satellites) Tom's marginal benefit
(dollars) Jerry's marginal benefit
(dollars) 1 50 40 2 40 32 3 30 24 4 20 16 5 10 8
Explanation / Answer
(a)
Efficient quantity is obtained by equating Marginal Cost to Social Marginal Benefit (Total marginal benefits of Tom and Jerry).
So, equilibrium quantity = 3, because at this level,
Marginal cost = $54 = Social Marginal Benefit = $(30 + 24)
(b)
The optimization rule for a private good is to equate marginal benefit with marginal cost. But for a public good, marginal cost is always zero, so that output is produced where marginal benefit is highest.
When quantity = 1, marginal benefit = 90 - 0 = 90 which is highest.
So, optimal output = 1 satellite.