1. Jill sells bouquets of flowers that she grows in her backyard. Jill's marginal cost of producing bouquets is given by MC = 0.25Q, where Q is the number of bouquets she makes. Jill can sell all the bouquets she wishes at the local farmers' market for $6 per bouquet. Unfortunately, Jill's floriculture aggravates the allergies of her next-door neighbor, Cooper: every bouquet that Jill grows produces 50 cents worth of sneezes.
(a) Jill wants to maximize her profit. Determine the profit-maximizing quantity of bouquets.
(b) Assume that Jill produces the quantity of bouquets you determined in (a). Add up the cost of the last bouquet to Jill and the cost that bouquets imposes on Cooper, and compare your answer to the $6 worth of benefit the last bouquet creates for the buyer. Is producing the last bouquet a good thing for society?
(c) From society point of view, is Jill overproducing or underproducing bouquets?
(d) Suppose that Jill marries Cooper. Determine the social marginal cost of producing bouquets by adding the 50 cents worth of damage each bouquet causes Cooper to Jill's private marginal cost. Express your answer as an equation.
(e) Determine how many bouquets Jill should produce if she fully considers the costs she imposes on her husband. Explain why it makes a difference if Cooper just a neighbor or is Jill's husband.
2. The private demand for drive-in movies is given by P = 20 - 0.1Q. The industry marginal costs of showing drive-in movies is given by MC = 0.1Q.
(a) Graph the private demand and marginal cost curves, and determine the price and quantity of movies that will be shown.
(b) Drive-in movies can be viewed imperfectly from outside the fence. The marginal external benefits received by such viewers are given by MEB = 2 - 0.01Q. Graph the external marginal benefits curve, and then use that information to graph the social demand curve.
(c) Suppose that all drive-in movies are nationalized and shown for the public good.
The Movie Czar chooses the price and quantity of movies that bring the greatest benefit net of costs to all viewers, regardless of the vantage point from which they view the movie. Determine the optimal price and quantity of drive-in movie.
(d) Can government-run movies potentially improve on the private market outcome when a positive externality exist?