Exercise 2 You are a profit-maximizing developer that needs to decide how tall your new building should be. The figure b

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Exercise 2 You Are A Profit Maximizing Developer That Needs To Decide How Tall Your New Building Should Be The Figure B 1 (138.63 KiB) Viewed 64 times

Exercise 2 You are a profit-maximizing developer that needs to decide how tall your new building should be. The figure below shows the marginal benefits (MB) and marginal private costs (MC) associated with each additional floor. Your costs increase with each additional floor. Building an additional floor will bring you more revenue, but this revenue will be higher at low heights than at tall heights. MC MB height in floors) a) What is the optimal height level you would choose as a profit-maximizing developer? Show it on the graph. b) Suppose now there are negative externalities associated with higher build- ings, such as windier streets or blocked views. Draw the marginal social costs curve (that takes into account these externalities) on the graph. What is the optimal height level now and how does it compare to the free market equilibrium level (bigger/smaller)? How would a city planner be able to implement this level? c) Now suppose that instead of negative externalities, there are positive ex- ternalities associated with higher buildings. How would the graph change now? What is the optimal height level now and how does it compare to the levels you identified in (a) and (b) (bigger/smaller).