Back to Assignment Attempts: Keep the Highest: Is 3. Voluntary contributions tow
ID: 1109551 • Letter: B
Question
Back to Assignment Attempts: Keep the Highest: Is 3. Voluntary contributions toward a public good Kevin and Rajiv are considering contributing toward the creation of a building mural. Each can choose whether to contribute $300 to the building mural or to keep that $300 for a pool table Since a building mural is a public good, both Kevin and Rajiv will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.90 of benefit. For example, if both Kevin and Rajiv choose to contribute, then a total of $600 would be contributed to the building mural. So, Kevin and Rajiv would each receive $540 of benefit from the building mural, and their combined benefit would be $1,080. This is shown in the upper left cell of the first table Since a pool table is a private good, if Kevin chooses to spend $300 on a pool table, Kevin would get $300 of benefit from the pool table and Rajiv wouldn't receive any benefit from Kevin's choice. If Kevin still spends $300 on a pool table and Rajiv chooses to contribute $300 to the building mural, Kevin would still receive the $270 of benefit from Rajiv's generosity. In other words, if Kevin decides to keep the $300 for a pool table and Rajiv decides to contribute the $300 to the public project, then Kevin would receive a total benefit of $300+S270- $570, Rajiv would receive a total benefit of $270, and their combined benefit would be $B40. This is shown in the lower left cell of the first table.Explanation / Answer
1. When Rajiv doesn't contribute and Kelvin Contribute:
Rajiv get benefit of 300 which he spend on pool table and $ 270 i.e. 0.90 of $ 300 which Kelvin spend on public good. So, total benefit received by Rajiv = 300 + 270 = $ 570
Kelvin gets benefit of $ 270 only.
Total benefit = $ 570 + $ 270 = $ 840
2. When Rajiv and Kelvin do not contribute:
Both will get benefit of $ 300 which they spend on weekend gateway. So, total benefit = $ 600
3. When both Kelvin and Rajiv contribute to the building mural.
4. Kelvin benefit when Rajiv doesn't contribute: 0.90 of Kelvin investment X 300 = $ 270
5. Kelvin benefit when Rajiv and he don't contribute: $ 300
6. Not to contribute
7. Not to contribute
8. The free rider problem or Positive Externality
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