Alex, kara, and susie are the only three people in a community. alex is willing to pay $40 for the third unit of a public good; kara is willing to pay $25. if the marginal cost of producing the third unit is $100, what is the minimum amount that susie must be willing to pay for it to be efficient for government to produce the third unit?

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Business

Jennifer Mcgrath

27 January, 19:46

Alex, kara, and susie are the only three people in a community. alex is willing to pay $40 for the third unit of a public good; kara is willing to pay $25. if the marginal cost of producing the third unit is $100, what is the minimum amount that susie must be willing to pay for it to be efficient for government to produce the third unit?

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Colby Irwin · Answer 1

I would say that Susie should pay at least $110 for the unit allowing for a 10% profit for the government to make it worthwhile to produce the unit and if many units were sold at this price, say 1000 then that would be $10,000 if it was in a relatively short period of time. Also, it is conceivable that the government could with some of the profits introduce a more efficient production system that could produce more units in the same time and thus increase its profit.