Suppose only 2 consumers and 1 good exist, where this good is first considered public and then private. Consumers have a willingness to pay (WTP) of 2 for the first unit and 1 for the second unit. Which is the highest WTP expressed by “the market” and the quantity demanded in correspondence of this maximum WTP in the two cases, i.e. a private and a public good?WTP will be equal to 4 in both cases; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private goodWTP = 4 in case the good is public, WTP = 2 in case the good is private; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private goodWTP = 4 in case the good is public, WTP = 2 in case the good is private; the quantity demanded will be 2 in the case of a public good and 1 in the case of a private goodWTP = 2 in case the good is public, WTP = 4 in case the good is private; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private good
Question
Suppose only 2 consumers and 1 good exist, where this good is first considered public and then private. Consumers have a willingness to pay (WTP) of 2 for the first unit and 1 for the second unit. Which is the highest WTP expressed by “the market” and the quantity demanded in correspondence of this maximum WTP in the two cases, i.e. a private and a public good?WTP will be equal to 4 in both cases; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private goodWTP = 4 in case the good is public, WTP = 2 in case the good is private; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private goodWTP = 4 in case the good is public, WTP = 2 in case the good is private; the quantity demanded will be 2 in the case of a public good and 1 in the case of a private goodWTP = 2 in case the good is public, WTP = 4 in case the good is private; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private good
Solution
The correct answer is: WTP = 4 in case the good is public, WTP = 2 in case the good is private; the quantity demanded will be 1 in the case of a public good and 2 in the case of a private good.
Here's why:
In the case of a public good, the total willingness to pay (WTP) is the sum of the WTP of each consumer. Since each consumer is willing to pay 2 for the first unit, the total WTP for the public good is 2+2=4. The quantity demanded is 1 because public goods are non-rivalrous, meaning that one unit of the good can be consumed by both consumers without reducing the amount available for the other.
In the case of a private good, the WTP is the highest price that a consumer is willing to pay. Since each consumer is willing to pay 2 for the first unit and 1 for the second unit, the total WTP for the private good is 2 (the highest price). The quantity demanded is 2 because private goods are rivalrous, meaning that each unit of the good can only be consumed by one consumer.
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