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Optimal level of parties

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?

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Solution Preview

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 ...

Solution Summary

Marginal costs and benefits of parties used to demonstrate optimal subsidy levels