Question

Consider an externality between a beekeeper and almond prodcution from an almond orchard. It costs the beekeeper $25 to maintain each beehive. If the beekeeper places her hives near the almond orchard almond production increases by $10 per hive. The benefit to the beekeeper from placing her hives near the almond orchard is $50 for the first hive, $40 for the second hive, $30 for the third hive, $20 for the fourth hive, $10 for the fifth hive and $0 for any subsequent hives. If the almond orchard buys the beekeeping operation (that is, the two activities are performed by the same firm) what is the number of hives that will be placed near the almond orchard?

(a) 1

(b) 2

(c) 3

(d) 4

(e) 5

Answer 1

He would go for only one hive . One hive costs only $25 . So shen he install a single hive benefit from placing it near Almond orchard is 50 $ and almond production increases by 10 $ as a consequence . So total benefit is 60$ against a total cost of 25 $ . So total profit is 35 $ . If he installed 2 hives , total cost of maintainance would be 50 $ , and profit would be 60-50= 10$ . Thus , it is best is install 1 bee hive to maximise profit