In the following 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 external 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 throw this number?
d. On your graph, show the optimal subsidy per party and the total amount paid to Cas-sanova. Who gains and loses under this plan?

Transcribed Image Text:

MC MB, Parties per month