Two MSU fraternities, Phi Kappa Sigma and Phi Kappa Tau, are accustomed to each having 6 parties
Question:
Two MSU fraternities, Phi Kappa Sigma and Phi Kappa Tau, are accustomed to each having 6 parties a month. Phi Kappa Sigma and Phi Kappa Tau are located close to each other on Bogue Street. These parties impose a negative externality on their other neighbors on Bogue Street. Suppose President Stanley decides that the socially optimal total number of parties on Bogue Street is 8 parties a month. The total benefits each fraternity derives from having a certain number of parties a month are given in the table below.
Number of Parties | ||||
0 | 0 | Ang, | 0 | |
1 | 300 | 250 | ||
2 | 500 | 475 | ||
3 | 650 | 650 | ||
4 | 700 | 750 | ||
5 | 740 | 825 | ||
6 | 775 | 850 |
a) Suppose President Stanley decides to limit the total number of parties to 8 by issuing Phi Kappa Sigma 6 rights and Phi Kappa Tau 2 rights. Each right allows the fraternity to have one party. If these rights are allowed to be traded, how many rights will be sold? Who will sell the rights and who will buy the rights? How much will these rights be sold for (identify possible range)? Explain your answers. b) Now suppose President Stanley limits the total number of parties to 8 by issuing Phi Kappa Sigma 4 rights and Phi Kappa Tau 4 rights. If these rights are allowed to be traded, how many rights will be sold? Who will sell the rights and who will buy the rights? How much will these rights be sold for (identify possible range)? Explain your answers. c) Explain why the benefit achieved is greater when the rights are allowed to be traded compared to when they are not allowed to be traded.