Due Today at 11 PM EST 5. Problems and Applications Q5 roommates are planning to
ID: 1117444 • Letter: D
Question
Due Today at 11 PM EST 5. Problems and Applications Q5 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) Rajiv Yakov Charles Gilberto First film Second film Third film Fourth film Fifth film 6 5 Within the dorm room, the showing of a movie apublic 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 equallyExplanation / Answer
In a dorm room the showing of a movie is a public good.
If it costs $8 to rent a movie the roommates should rent 3 movies in order to maximise total surplus. Because if they rent three movies then they have to pay total 3*8 = $24. Now they are willing to pay total $39 and as a result they are getting total surplus $15.For Rajiv (7+6+5=18), for Yakov (5+4+3=12), for Charles (3+2+1=6), for Gilbarto (2+1+0=3) , so total 18+ 12+ 6+ 3 =39 .
Suppose the roommates choose to rent the optimal number of movies then if cost are equally splitted then each roommates will pay $6. Because the costs $24 has been divided into four parts.
In order to split the cost in a way that ensures that everyones benefits, the cost could be divided up based on the benefits each receives. The practical problem with this solution is that each roommates has an incentive to hide the values of the movies to him.
Suppose if they agree in advance to choose the efficient number and to split the cost of the movies equally.
When Rajiv will be asked his willingness to pay , he will have an incentive to tell the truth is false. Because he will have no interest to reveal his willingness to pay for the good.
This example teaches us that the optimal provision of a public good will occur if individual has an incentive to hide their valuation of the good.
Total willingness to pay Consumer Surplus Rajiv 18 18-6 =12 Yakov 12 12-6 = 6 Charles 6 6-6 = 0 Gilbarto 3 3-6 = -3Related Questions
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