Groucho smokes; Harpo hates smoke. Groucho has the right to smoke, and he curren

Question

Groucho smokes; Harpo hates smoke. Groucho has the right to smoke, and he currently smokes 12 cigars per day. He faces marginal costs of reducing smoking (withdrawal pains) equal to $x, where x is the number of cigars reduced. In other words, the cost of giving up the first cigar is $1, the second, $2, and so forth. Harpo receives marginal benefits (reduced discomfort and risk of cancer) equal to $(12-x) from Groucho reducing the number of cigars smoked. Now assume their boss reduces Harpo’s wages. Harpo cannot afford to pay Groucho more than $30 a day to reduce the amount of smoking in their office. How many cigars will Groucho smoke now, given this increased inequality? How much money will Groucho charge Harpo for this reduction in smoking? Is the new outcome efficient? Is it fair?

Explanation / Answer

In case of no budget, Efficient Outcone will be where

MSB to Harpo = MSC to Groucho

$12 - X = X

X = 12/2 = 6

So, Number of cigars reduced = 6

Price paid to reduce 6 cigars = 6*6 = 36

Since, now the maximum budget is 30

So, Harpo will try reduce the price paid to reduce cigar smoking as his budget 30.

So , Now Goucho will amoke now = 5 cigars

Money which Groucho charge Harpo for this reduction in smoking = $5*5 = $25

No, the New Outcome is efficient as at this Point MSC to Goucho is n't equal to MSB to Harpo.

Yes, it is fair as amount is paid on the basis of marginal cost of not smoking Goucho and marginal benefit to harpo.

If you don't understand anything, then comment, I will revert back on the same.

And If you liked the answer then please do review the same. Thanks :)

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.