This problem continues the story of the airport and the developer from the previous problem.
(a) “Merger”: Suppose that the housing developer purchases the airport. What is the profit function for the new joint entity? 48X − X2 + 60Y − Y2 – XY
To maximize joint profits, it should build 24 houses and let 12 planes land. Combined profit is now 1008. Explain why each of the institutional rules proposed in the previous problem fails to achieve an efficient outcome and hence has lower combined profits. In
(b) “Dealing”: Suppose that the airport and the developer remain independent. If the original situation was one of “free to choose,” could the developer increase his net profits by bribing the airport to cut back one flight per day if the developer has to pay for all of the airport’s lost profits? __________ The developer decides to get the airport to reduce its flights by paying for all lost profits coming from the reduction of flights. To maximize his own net profits, how many flights per day should he pay the airport to eliminate?