5. Problems and Applications Q5 Four roommates are planning to spend the weekend in their dorm…
5. Problems and Applications Q5
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)
Andrew
Darnell
Jacques
Musashi
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 a
public good.
If it costs $8 to rent a movie, the roommates should rent
movies 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.
Roommate
Total Willingness to Pay
Consumer Surplus
(Dollars)
(Dollars)
Andrew
Darnell
Jacques
Musashi
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 roommate
has an incentive to 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 Andrew is asked his willingness to pay, he
will have an incentive to understate the value of the movies to
him.
True
False
This examples teaches you that the optimal provision of a public
good will occur if individuals an incentive
to hide their valuation of the good.
