The graph below shows the monthly marginal private benefits and the marginal cost of operating a day-care centre in Fredericton. Suppose that research indicates that the marginal external benefits of a day-care centre is $400 per child.

a. Show the new marginal social benefits in the graph below and label it MSB.

b. What is the ideal number of students at this day care centre?

Optimum number: __________ children

c. Now suppose that further research indicates that there are marginal social costs equal to $200 per child due traffic and increased noise. Draw in the MSC curve on above graph.

d. Now what is the optimum number of students in this day care when both marginal social benefits and costs are considered?

Optimum number of children: __________

1200 1000 Day care fee and costs 800 OF MPC 600 400 MPB 200 0 OL I 0 40 80 120 160 200 240 280 Number of day care - spaces