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 1 2 3 4 5 6 Phi Kappa Sigma's Total Benefits 0 300 500 650 700 740 775 Phi Kappa Sigma's Marg. Benefits Phi Kappa Tau's Total Benefits 0 250 475 650 750 825 850 Phi Kappa Tau's Marg. Benefits 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.
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 1 2 3 4 5 6 Phi Kappa Sigma's Total Benefits 0 300 500 650 700 740 775 Phi Kappa Sigma's Marg. Benefits Phi Kappa Tau's Total Benefits 0 250 475 650 750 825 850 Phi Kappa Tau's Marg. Benefits 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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:**Educational Website Content:**
**Fraternity Party Analysis on Bogue Street**
Two MSU fraternities, Phi Kappa Sigma and Phi Kappa Tau, host six parties each month on Bogue Street, which negatively impacts their neighbors. To address this, President Stanley proposes limiting the total number of parties to eight per month—the breakdown of benefits from these parties is illustrated below:
| Number of Parties | Phi Kappa Sigma's Total Benefits | Phi Kappa Sigma's Marg. Benefits | Phi Kappa Tau's Total Benefits | Phi Kappa Tau's Marg. Benefits |
|-------------------|---------------------------------|---------------------------------|-------------------------------|-------------------------------|
| 0 | 0 | - | 0 | - |
| 1 | 300 | 300 | 250 | 250 |
| 2 | 500 | 200 | 475 | 225 |
| 3 | 650 | 150 | 650 | 175 |
| 4 | 700 | 50 | 750 | 100 |
| 5 | 740 | 40 | 825 | 75 |
| 6 | 775 | 35 | 850 | 25 |
**Questions:**
a) **Trading Rights Scenario 1:**
- President Stanley issues Phi Kappa Sigma 6 rights and Phi Kappa Tau 2 rights, with rights tradable for party hosting.
- Determine the number of rights sold, identify sellers/buyers, and estimate the price range.
b) **Trading Rights Scenario 2:**
- President Stanley issues 4 rights each to both fraternities, with rights still tradable.
- Determine the number of rights sold, identify sellers/buyers, and estimate the price range.
c) **Benefits of Trading:**
- Discuss why allowing trading increases benefits compared to a non-trading scenario.
**Analysis:**
- **Benefit Analysis:**
- Trading enables each fraternity to maximize their total and marginal benefits by adjusting party numbers according to the efficiency of those rights' utility.
- **Graph Interpretation:**
- The table outlines benefits for each fraternity per additional party, demonstrating diminishing marginal returns for more parties beyond initial ones, highlighting the social benefit of limiting parties.
This exploration into trading party rights can serve as a
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 5 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education