The famous singer Jason Lumberpond likes to drive his solid-gold rocket car back and forth in front of his house. The loud noise from the rocket engines imposes a loss equal to $L on his neighbors. There are two possible ways to avoid that loss. Jason can install an expensive muffler, or the neighbors can install soundproofing on their houses. The muffler costs $C and the soundproofing costs $E. Suppose that L > E > C. What outcome maximizes total surplus?

Question

Randy Wright

Business

13 February, 13:48

The famous singer Jason Lumberpond likes to drive his solid-gold rocket car back and forth in front of his house. The loud noise from the rocket engines imposes a loss equal to $L on his neighbors. There are two possible ways to avoid that loss. Jason can install an expensive muffler, or the neighbors can install soundproofing on their houses. The muffler costs $C and the soundproofing costs $E. Suppose that L > E > C. What outcome maximizes total surplus?

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Answers (1)

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Victoria · Answer 1

The total surplus will be maximized if Jason installs the muffler and the neighbors do not install soundproofing.

Explanation:

First, according to the relationship, L > E > C, since the loss is greater than the cost of either installing a muffler or installing a soundproofing, one of the muffler or the soundproofing must be installed to avert the loss.

Moreover, since it is cheaper to install a muffler than to install a soundproofing, it is more economical to install a muffler provided both serve the same purpose of stopping the loud noise.