Question
A government is planning to organise public fireworks. Their analysts split the country's population into 2 groups based on income. They estimated the willingness-topay curves
A government is planning to organise public fireworks. Their analysts split the country's population into 2 groups based on income. They estimated the willingness-topay curves for both groups: 1 = 50.5, 2 = 10.25, where is the length of the show. Both groups are of the same size. The marginal costs of organising fireworks are = (9/16) 2 . There is also a fixed cost of 4/9 associated with the event. a) Derive the total willingness-to-pay curve. Plot it on a graph together with the groupspecific willingness-to-pay curves. (Hint: what is the total willingness-to-pay if the length of the show is 1?) [4 marks] b) Find the optimal length of the fireworks show [3 marks] c) Do the fixed costs affect the optimal length of the fireworks show? Do the fixed costs affect the government's decision on whether the fireworks show should be organised or not? Explain your answers briefly.
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