1. Using the example in Boxes 18E and 18F, work through the implications of a specific subsidy to J&J if it locates in Camden.

a. How big does the subsidy have to be to induce J&J to move to Camden?

Call this the critical value.

b. If the subsidy is less than the critical value, construct the parallelogram of benefits required for stability.

c. Find the midpoint. Who gains as the subsidy rises? Who loses? Who is unaffected?

d. Suppose the subsidy is greater than the critical value. Construct the region of benefits required for stability. (Hint: It’s not going to be a parallelogram this time.) Princeton’s benefits cannot exceed $14. Draw this line on the diagram and note that it places a different upper bound on the benefits that Camden can get.

e. Find the midpoint. Who gains as the subsidy rises? Who loses? Who is unaffected?