Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is their willingness to pay for each film:
Willingness to Pay
(Dollars)
Kevin Rajiv Yakov Charles
First film 10 9 6 3
Second film 9 7 4 2
Third film 8 5 2 1
Fourth film 7 3 0 0
Fifth film 6 1 0 0
Within the dorm room, the showing of a movie ( IS OR IS NOT ) a public good.
If it costs $8 to rent a movie, the roommates should rentmovies in order to maximize the total surplus.
Suppose the roommates choose to rent the optimal number of movies you just indicated and then split the cost of renting equally
This means that each roommate will pay $.
Complete the following table with each roommate's total willingness to pay for this many movies and the surplus each person obtains from watching the movies.
Total Willingness to Pay Consumer Surplus
Roommate (Dollars) (Dollars)
Kevin
Rajiv
Yakov
Charles
In order to split the cost in a way that ensures that everyone benefits, the cost could be divided up based on the benefits each roommate receives.
The practical problem with this solution is that each roommates has an incentive to ( UNDERSTATE OR OVERSTATE ) the value of the movies to him.
Suppose they agree in advance to choose the efficient number and to split the cost of the movies equally.
True or False: When Kevin is asked his willingness to pay, he will have an incentive to tell the truth.
a. True
b. False
This examples teaches you that the optimal provision of a public good will occur if individuals ( DO NOT HAVE OR DO HAVE ) an incentive to hide their valuation of the good.
Answers: 3
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