# In deriving the second Edgeworth box ,for factors

Ture/False Questions
and justify yout answer as fully as you can( and use a diagram if need be to

1.
In deriving the second Edgeworth box ,for factors, we
really did not learn anything new. This is because the cost-minimization
problem for a firm is completely identical to the utility maximization problem
for an individual. Only the subscripts and variables are changed.

Consider a hypothetical small town with 1,000 identical
families( as to taste and income). Each family has the following marginal
benefits as to the possible number of police officers hired for the town.

Marginal
benefits (MB)

One Two Three
Four Five
\$200 \$150 \$100
\$50 \$0

Assume that police services are a standard, pure public good
as discussed in class. Also assume that the marginal cost of having an
additional policde officer is a constant \$50.000 (to pay and equip each police
officer)

2.
If no city government exists, then a free-market
equilibrium would be one officer, since each individual family would hire one
police officer to maximize their utility. But a city government would hire five
police officers, sine this number would exhaust marginal benefits for having police
officers.

3.
Assume that a city government has only police services
as an expense item, and the government must balance its budget. Then the
appropriate per-family tax T* would be T*=\$0. The is because MC*=MB*=0, such
that an optimal tax is equalling marginal costs. Not only is this \$0 charge
efficent, it is equitable. Since poor families do not pay any tax, and families
who actually prefer police services( as opposed to those who donâ€™t) do not pay
any tax.

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