The private demand for drive-in movies is given by P = 20 – 0.1Q. The industry marginal cost 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 external marginal benefits received by such viewers are given by EMB = 2 – 0.01Q. Graph the external marginal benefit 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 movies.
d. Indicate the deadweight loss created by the positive externality as an area on your graph, and calculate its value. (Hint: You’ll need to determine how much external marginal benefit the very last unit of output created when drive-ins were privately run.)
e. Can government-run movies potentially improve on the private market outcome when a positive externality exists?
Already registered? Login
Not Account? Sign up
Enter your email address to reset your password
Back to Login? Click here