Exam 35:Externalities-Part A

Mike's utility function is U(c,d,h)=8c + 12d -d² - 6h,where d is the number of hours per day that he spends driving around,h is the average number of hours per day spent driving around by other citizens of his town,and c is the amount of money he has to spend on other things than gasoline and auto repairs.There are 1,001 identical citizens in Mike's home town.Mike's expenses for gasoline and auto repairs amount to $.50 per hour for the time he spends driving.If Mike believes that his amount of driving won't affect the amount that others drive,how many hours per day will he choose to drive?

Suppose that in Horsehead,Massachusetts,the cost of operating a lobster boat is $4,000 per month.Suppose that if x lobster boats operate in the bay,the total monthly revenue from lobster boats in the bay is $1,000(12x - x²).If there are no restrictions on entry and new boats come into the bay until there is no profit to be made by a new entrant,then the number of boats who enter will be X₁.If the number of boats that operate in the bay is regulated to maximize total profits,the number of boats in the bay will be X₂.