A dentist shares an office building with a radio station. The electrical current from the dentist's drill causes static in the radio broadcast, causing the radio station to lose $10,000 in profits. The radio station could put up a shield at a cost of $30,000; the dentist could buy a new drill that causes less interference for $6,000. Either would restore the radio station's lost profits. What is the economically efficient outcome?
A)The radio station puts up a shield, which it pays for.
B)The radio station puts up a shield, which the dentist pays for.
C)Neither the radio station nor the dentist purchase additional equipment.
D)The dentist gets a new drill; it does not matter who pays for it.

Question

Quizplus · Accepted Answer

The economically efficient outcome is for the dentist to get a new drill, as it costs $6,000, which is less than the $10,000 loss in profits for the radio station and the $30,000 cost of a shield. It minimizes the total cost of resolving the interference issue.

A Dentist Shares an Office Building with a Radio Station