Author Question: A marginal cost curve A) is upward sloping. B) shows that as more of a good is produced, ... (Read 35 times)

WWatsford · **on:** Jun 29, 2018

A marginal cost curve

A) is upward sloping.
B) shows that as more of a good is produced, opportunity costs of producing another unit increase.
C) is bowed inward so that its slope can become negative.
D) Both answers A and B are correct.

Question 2

Suppose Phillips and Mathew are the only tenants in a building. The owner of the building is considering installing surveillance cameras in the building.

The following table shows the amount that Phillips and Mathew are willing to pay for each additional camera:

Number of Surveillance Cameras Phillips's Willingness
to Pay Mathew's Willingness to Pay
1 400 300
2 310 200
3 210 110
4 80 30

If the cost of installing each surveillance camera is 320, how many cameras will the owner of the building install to maximize welfare?

nguyenhoanhat · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

D

Answer to Question 2

The owner of the building will continue installing cameras until the marginal cost of installing an additional camera equals the marginal benefit from its installation. The marginal benefit from the installation of a camera can be estimated from the total willingness to pay for an additional camera. Thus, the owner will continue installing cameras as long as the total willingness to pay for a camera exceeds the marginal cost. The total willingness to pay for the first surveillance camera is 400 + 300 or 700, which exceeds the marginal cost of 320. Therefore, the first camera will be installed. The total willingness to pay for the second camera is 310 + 200 or 510. Therefore, the second camera will also be installed. The total willingness to pay for the third camera is 210 + 110 or 320 which equals the marginal cost. Therefore, the third camera will also be installed. Because the total willingness to pay for the fourth camera is lower than the marginal cost, only 3 cameras will be installed.