Question

Answer is attached with question. Please help with graph

(Question 5:9 points total, 4 for each part) Remember Fred and Penny: We assumed a two- person world. Penny is a smoker, Fred is not, and the smoke makes Fred sick. Cigars are provided for free by God, the marginal cost of cigars is zero for both Penny and Fred. Continue to assume that Penny enjoys smoking some cigars and continue to assume that her marginal benefit from each additional cigar declines. Continue to assume there is a fixed relationship between the number of cigars that Penny smokes and the amount of second-hand smoke that Fred consumes. Initially assume that there i s not government intervention. (Question 5 Part A) Redraw the graphs but draw them such that from society's perspective the efficient number of cigars smoked by Penny is zero. Include the marginal benefit curve for Fred. Make sure to identify both axis and each of the lines on your graph. If you think it will make your answer clearer, describe what is going on in words. Answer: You have to draw the graphs such that the MBp starts positive (greater than zero) and then declines, hitting zero at some positive but finite amount of cigars. It also has to be the case that the MBs of the first cigar smoked is zero or negative. This will require that the MBf curve for Fred starts very negative (more negative than Penny's is positive). Most of you drew the curves so that the efficient number of cigars from society's perspective is a positive number. The question said it had to be zero. A few of you drew curves such that every amount smoked would be efficient, including the number Penny chooses to smoke (Question 5 Part B) Identify the equilibrium numbers of cigars smoked by Penny from her perspective assuming not government intervention. Contrast this number with the efficient number of cigars. Explain why the market is failing. Answer: On the graph I would identify the number of cigars where MBp-0. She will keep smoking another cigar as long as the benefits she gets from an additional cigar are positive. She will smoke a positive number of cigars, which is greater than zero, the efficient number of cigars. Why does the market fail; that is, why does Penny smoke too many from society's perspective? It is because the marginal benefit to her of smoking an additional ciar (MBp) is greater than the MBs. Note that MBs- MBp+MBf where MBf is negative