18. Consider the following net benefits (measured in billions of dollars) that will result from the passage of two legislative bills, X and Y:
(A) Identify the logrolling opportunity present in this situation.
(B) Identify the potential gains to voters.(C) Explain why logrolling is efficiency enhancing. Ans:
(A) On their own, neither issue X nor Y will pass. Both will be voted down by votes of 2-1. If person A trades a vote with B, then both issues will pass by 2-1 votes.
(B) With both issues passed, overall utility for person A is 3. For person B, overall utility is 4. For person C, overall utility is –5.
(C) With issue X passed, society is benefited because it had a total benefit to society of 3.
Logrolling also allowed issue Y to pass, though it shouldn’t have since its total benefit to society is –1.
19. Suppose there were three candidates running for office: Dewey, Cheatum, and Howe. Suppose a majority of voters preferred Cheatum to Dewey. Does this mean that a majority of voters preferred Howe to Dewey?
Ans: Suppose there are three voters. The following example illustrates the counter-example. Each voter ranks the candidates in order of preference. Cheatum beats Dewey, but Dewey beats Howe.
20. Suppose that you have two people in an economy, Ms. Hundley and Mr. McKenna, who want to produce a public good S. Suppose we calculate the Lindahl equilibrium using the method in your textbook. In this case, the demand curve for Ms. Hundley is S=P1/2. The
demand curve for Mr. McKenna is S=8/P. If the marginal social cost of the project is 10, what is the Lindahl equilibrium quantity of S? What are the Lindahl prices?
Ans: Set P1/2 = 8/P. Multiply both sides by P, leaving P3/2 = 8. Therefore, P = 82/3 = 4. At P = 4, S* = 2. Mr. McKenna pays 4. Ms. Hundley pays 6.
21. Consider Figure 6.5 in your textbook. If the equation for the demand curve were X = 18 – P/2 and marginal revenue were X = 9 – P/4 with MC constant at 10, how much rent would there be?
Ans: The cartel quantity would be found by setting MR = MC, which would be 6½. The
corresponding cartel price would be 23. The rents would be found by subtracting the MC of 10 from the cartel price of 23, which gives 13. Multiply that by 6½ for 84½.
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