ECON 471 Lecture : Econ371_practice_sols_q2.pdf
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2. (a) to maximize pro ts, the bee-keeper will increase the number of hives up to the point where the mb (which is worth of honey) equals the mc. 40 = 4h + 20 h = 5. So the privately optimal number of hives is 5. B = 5(40) (cid:2)2(5)2 + 20(5) + 20(cid:3) = 30 (b) the social mb of each hive is , which is the value of the honey produced () plus the of pollination services provided. Therefore to determine the socially optimal number of hives we solve. 60 = 4h + 20 h = 10. (c) with no transaction costs, we would expect the socially optimal outcome to arise from bargaining between the bee-keeper and the farmer, with the bee-keeper having 10 hives. Without a side-payment from framer to bee-keeper, the bee-keeper"s pro t with 10 hives would be.
