Homework #3, Econ 611, Prof. Hanson

1. Consider a market for pet sitting, where someone will come and stay at your house and watch your pets while you are away. The person who values getting his house sat the most is willing to pay $100 for it (so P_D = 100 when Q_D = 0). The hundredth person is willing to pay nothing (so P_D = 0 when Q_D = 100.) The person who likes to pet sit the most is willing to pay $20 for the privilege, but the hundredth person must be paid $30 to pet sit. Demand and supply are both linear (i.e., lines on a P,Q graph). What is the free market quantity and price of pet sitting? What is the producer surplus (PS), consumer surplus (CS) and dead weight loss (DWL).

2. If the people who pet sit must pay a $40 tax per event, what will be the quantity, price, PS, CS, DWL, and tax revenue (TR)?

3. If a law prohibits giving cash for pet sitting, and people must stand in line to find a willing pet sitter, what is the quantity, price, PS, CS, and DWL?

4. If a law prohibits giving cash for pet sitting, and pet sitters are randomly assigned to people who ask for them, what is the quantity, price, PS, CS, and DWL?

5. Five students share a house, and might buy cable TV, at a total cost of  $40 per month.  Two of the students clearly love cable TV, and each place a value of $20 per month on having cable TV.  Among the other three students, two of them mildly like cable TV, and would benefit by $5 per month, while the other student dislikes cable TV, and would suffer a loss of $5 per month.  Unfortunately, there is no way to tell by looking at them which of these last three students is the one who dislikes cable TV.

a. If the students vote on whether to buy cable TV, with each student paying the same share of the cost, will the outcome be economically efficient?

b. Is there a way to use transfers among the students so that all the students benefit from buying cable TV?