Demand for hours of music function of price of electricity

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Reference no: EM131195544

Luis is a fan of loud music that he plays on his stereo system. His utility function is defined by equation:

U(q, y) = 10q − 1/2q^2 + y

where q is the number of hours of music he plays, and y is his consumption of all other goods. Each hour of music he plays costs him $2 in electricity, but his income is large enough that he could always afford to play music 10 hours a day if he so wished.

(a) Find Luis’ demand for hours of music as a function of the price of electricity

(b) Luis has a roommate, Maria, who has the same utility function as Luis. She doesn’t have a stereo system, nor does she pay the electricity bill, but she listens to the music. How many hours of music maximizes social surplus?

U(q, y) = −2q − 1/2q^ 2 + y Now which allocation maximizes total surplus, and what (Pigouvian) tax/subsidy enables this allocation to be attained?

Reference no: EM131195544

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