8. Best responses for individual contributions to a public good Larry and Megan each rent one unit of a two-unit apartment building. The building has two separate furnaces located between the two apartments. The renters each control and pay for the heat their furnaces generate and would choose to increase the temperature of their apartments by 30 degrees if the other never turned on their furnace, given that the marginal private benefit (MB) of the 30th degree is equal to the marginal cost (MC) of 1 degree of heat (assume that the MC of heat is constant and that the of heat is decreasing). However, each degree of heat paid for by one not only raises the temperature in that apartment by a degree but also raises the temperature in the other apartment by half a degree. As a result, if Megan were to buy 10 degrees of heat, then Larry would need to purchase only marginal benefit of the final degree was equal to the marginal cost. degrees of heat before his personal Use the blue line (circle symbol) to plot Larry's best-response function (BRF) on the following graph, with the total amount of heat he will buy on the vertical axis as a function of the total amount Megan buys (horizontal axis). (Hint: Larry's response to Megan's purchase noted previously represents one point on the line, and the response when Megan purchases 0 degrees of heat will be the vertical intercept.) Then, use the orange line (square symbol) to plot Megan's best-response function, with the total amount she will buy (horizontal axis) as a function of the total amount Larry buys (vertical axis). Finally, place the black point (plus symbol) on the graph to indicate the Nash equilibrium amount of heat each person will purchase, given the other's equilibrium choice. Note: Dashed drop lines will automatically extend to both axes.
8. Best responses for individual contributions to a public good Larry and Megan each rent one unit of a two-unit apartment building. The building has two separate furnaces located between the two apartments. The renters each control and pay for the heat their furnaces generate and would choose to increase the temperature of their apartments by 30 degrees if the other never turned on their furnace, given that the marginal private benefit (MB) of the 30th degree is equal to the marginal cost (MC) of 1 degree of heat (assume that the MC of heat is constant and that the of heat is decreasing). However, each degree of heat paid for by one not only raises the temperature in that apartment by a degree but also raises the temperature in the other apartment by half a degree. As a result, if Megan were to buy 10 degrees of heat, then Larry would need to purchase only marginal benefit of the final degree was equal to the marginal cost. degrees of heat before his personal Use the blue line (circle symbol) to plot Larry's best-response function (BRF) on the following graph, with the total amount of heat he will buy on the vertical axis as a function of the total amount Megan buys (horizontal axis). (Hint: Larry's response to Megan's purchase noted previously represents one point on the line, and the response when Megan purchases 0 degrees of heat will be the vertical intercept.) Then, use the orange line (square symbol) to plot Megan's best-response function, with the total amount she will buy (horizontal axis) as a function of the total amount Larry buys (vertical axis). Finally, place the black point (plus symbol) on the graph to indicate the Nash equilibrium amount of heat each person will purchase, given the other's equilibrium choice. Note: Dashed drop lines will automatically extend to both axes.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text:8. Best responses for individual contributions to a public good
Larry and Megan each rent one unit of a two-unit apartment building. The building has two separate furnaces located between the two apartments.
The renters each control and pay for the heat their furnaces generate and would choose to increase the temperature of their apartments by 30
degrees if the other never turned on their furnace, given that the marginal private benefit (MB) of the 30th degree is equal to the marginal cost (MC)
of 1 degree of heat (assume that the MC of heat is constant and that the MB of heat is decreasing). However, each degree of heat paid for by one not
only raises the temperature in that apartment by a degree but also raises the temperature in the other apartment by half a degree.
degrees of heat before his personal
As a result, if Megan were to buy 10 degrees of heat, then Larry would need to purchase only
marginal benefit of the final degree was equal to the marginal cost.
Use the blue line (circle symbol) to plot Larry's best-response function (BRF) on the following graph, with the total amount of heat he will buy on the
vertical axis as a function of the total amount Megan buys (horizontal axis). (Hint: Larry's response to Megan's purchase noted previously represents
one point on the line, and the response when Megan purchases 0 degrees of heat will be the vertical intercept.) Then, use the orange line (square
symbol) to plot Megan's best-response function, with the total amount she will buy (horizontal axis) as a function of the total amount Larry buys
(vertical axis). Finally, place the black point (plus symbol) on the graph to indicate the Nash equilibrium amount of heat each person will purchase,
given the other's equilibrium choice.
Note: Dashed drop lines will automatically extend to both axes.
HEAT BOUGHT BY LARRY
100
90
80
288 28
60
40
30
20
10
0
0
10
20
O True
40
30
50 60 70
HEAT BOUGHT BY MEGAN
O False
80
90 100
Larry's BRF
Megan's BRF
++
Nash Equilibrium
Suppose the government is worried about the low temperatures and wants to increase heat consumption.
(?
True or False: The current Nash equilibrium is inefficiently low, but a government subsidy would change only the slope of the functions and not the
equilibrium outcome.
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