Pam and Kunal are the only members of a community that is trying to determine how much of a public good should be produced. Suppose that Pam is willing to pay $10 for the fourth unit of the public good and that Kunal is willing to pay $6 for the fourth unit. The marginal cost of producing the public good is constant at $4. Which of the following is true?
A) Fewer than four units of the public good should be produced.
B) Exactly four units of the public good should be produced.
C) The Lindahl equilibrium is established when the price of the public good is $10.
D) More than four units of the public good should be produced.

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tallinn tallinn · Answer 1 · 2020-03-09T10:08:52+01:00

Answer:

D) More than four units of the public good should be produced

Explanation:

Marginal cost refers to the additional cost incurred for an extra unit of a good produced.

A firm continues production till the point marginal profit is zero.

Marginal profit is the excess of marginal revenue over marginal cost.

Marginal revenue refers to the addition to total revenue when an additional unit of output is sold.

In the given case, marginal profit is positive under both the scenarios.

Thus, more than four units of public goods shall be produced until the point marginal profit is zero i.e marginal revenue = marginal cost.