In the accompanying figure, the number of parties that Cassanova gives per month is measured on the horizontal axis, and dollars are measured on the vertical. MCp is the marginal cost of providing parties and MBp is Cassanova's marginal benefit schedule from having parties.
a. Graphically, show how many parties Cassanova will host.
b. Suppose there is a fixed marginal benefit, $b, per party to Cassanova's friends. illustrate this on your graph.
c. What is the socially (no pun intended) optimal level of parties? How could the Social Committee induce Cassanova to host this number of parties?
d. 0n your graph, show the optimal subsidy per party and the total amount paid to Cassanova. Who gains and loses under this plan?
a. See the attached file. He will host parties until the MCp of the last party is the same as the MBp he derives from the last party. This would be described as C number of ...
Marginal costs and benefits of parties used to demonstrate optimal subsidy levels
External Costs with Fixed-Production Technology
(See attached file for full problem description with diagram)
8. (External Costs with Fixed-Production Technology) Review the situation illustrated in Exhibit 1 in this chapter. If the government sets the price of electricity at the socially optimal level, why is the net gain equal to triangle abc, even though consumers now pay a higher price for electricity? What would the net gain be if the government set the price above the optimal level?