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Guidance

Exercise 1: The demand for a good X of two individuals (A and B) is known as:
1. Determine the aggregate demand when: a. X is a private good; b. X is a public
good
2. If the marginal cost to produce an additional unit of good X is 5 then what is
the optimal level of output to be provided when: a. X is a private good; b. X is a
public good

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a. X is a private good: Horizontal summation of individual demand

P(AB)=P(A)=P(B) 1 2 3 4 5 6 7 8
Q(AB)=Q(A)+Q(B) 60 54 48 42 36 30 24 18
b. X is a public good: Vertical summation of individual demand
Q(AB)=Q(A)=Q(B) 12 16 20 24
P(AB)=Q(A)+Q(B) 14 11 8 5

2. If the marginal cost to produce an additional unit of good X is 5 then what is

the optimal level of output to be provided when:
a. X is a private good: P=MC=5=> Q(AB)=Q(A)+Q(B)=16+20
b. X is a public good: P=MC=5=> Q(AB)=Q(A)=Q(B)=24

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Exercise 2. Two individuals, A and B,

have decided to arrange a small park
between their respective houses. However,
they have very different opinions how big
this park should be. In this figure, we see
their different marginal willingness to pay.
We have also drawn the marginal cost,
MC, of producing different quantities of
park. Show how A and B can decide on the
optimal quantity of park.

First, we need to construct a curve for the aggregate willingness to pay, i.e. how much A and B
together are willing to pay for different quantities of the park.
To that end, we sum the individual demand curves vertically. In the direction of the Y-axis, we
can put B’s maximum valuation on top of A’s, and thereby get the aggregate maximum
willingness to pay.
At the far right, at enough high quantities, only A demands additional units. Over that interval,
the aggregate demand is equal to A’s demand. If we tie the two parts together, we get the curve
labeled DA + DB in Figure. The point where the aggregate willingness to pay intersects the
MC curve is the optimal choice.
In the figure, it is labeled q* . Since they have different marginal willingness to pay, they
should not have to pay the same amount. A should pay the amount labeled A on the Y-axis,
whereas B should pay the amount labeled B

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Exercise 2.

Exercise 3. A good X has the following individual demand curves:

DA: Q = 22-2P (Q: product; P: USD)
DB: Q = 26-2P.
1. Determine the aggregate demand curve for good X in two cases:
a. X is a private good? QAB = QA + QB
b. b. X is a public good? PAB = PA + PB
2. If the marginal cost of producing good X is 5 USD/ product. Determine the
efficient quantity in two cases: P = MC =5
a. X is a private good? Q=28
b. X is a public good? Q=19
3. Illustrations on graphs (do by yourself as following the lecture)

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Exercise 4. The market for goods X of two individuals has the following
individual demand curve
D1: P = 12-Q (Q: product; P: USD)
D2: P = 18-4Q.
1. Determine the aggregate demand curve for good X in two cases:
a) X is private good; b) X is a public good
2. Determine the efficient quantity of X if the total cost of the production of this
good is: TC = 0.5Q2 + 4 in two cases: a) X is private good; b) X is a public
good
MC = (TC)’ =Q; the efficient quantity as P=MC
a) X is private good Q=18/5; b) X is a public good Q=5