Question

1. Madison has two residents: Sam and Ryan. Both love to drive. Each resident’s utility depends positively on the weight of his own car (WR or WS) and the total amount of a public good, snow removal, purchased in the town. Specifically,both residents i have utility functions, Ui= 4 ln(Wi) + ln(R) The total amount of snow removal (measured in dollars) is the sum R=RR+RS+RG of Ryan’s snow-removal purchase, Sam’s snow-removal purchase, and the local government’s snow removal purchase.Sam and Ryan each have incomes of $2,500, and all cars sell for a price of $W($1 per pound).

Question's: (b) Now consider how the equilibrium outcome changes when the local government implements a small tax of $τ per resident and uses the proceeds to spend RG= $2τ on snow removal

.i. Write down Ryan’s and Sam’s new utility maximization problems. How have their incentives to purchase snow removal changed? ii. Solve again for Ryan’s and Sam’s “best response” rules

Answer 1