Sarah and Melissa are considering contributing toward the creation of a building

Question

Sarah and Melissa are considering contributing toward the creation of a building mural. Each can choose whether to contribute dollar 200 to the building mural or to keep that dollar 200 for a cell phone. Since a building mural is a public good, both Sarah and Melissa will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them dollar 0.75 of benefit. For example, if both Sarah and Melissa choose to contribute, then a total of dollar 400 would have been contributed to the building mural. So, Sarah and Melissa would each receive dollar 300 of benefit from the building mural, and their combined benefit would be dollar 600. Since a cell phone is a private good, if Sarah chooses to spend dollar 200 on a cell phone, Sarah would get dollar 200 of benefit from the cell phone and Melissa wouldn't receive any benefit from Sarah's choice. However, if Melissa chooses to contribute dollar 200 to the building mural, Sarah would still receive the dollar 150 of benefit from Melissa's generosity. In other words, if Sarah decides to keep the dollar 200 for a cell phone and Melissa decides to contribute the dollar 200 to the public project, then Sarah would receive a total benefit of dollar 200 + dollar 150 = dollar 350, Melissa would receive a total benefit of dollar 150, and their combined benefit would be dollar 500. The following table shows the combined benefits of Sarah and Melissa. As described previously, if both Sarah and Melissa contribute to the building mural, their combined benefit would be dollar 600; this is shown in the upper left cell of the table. Similarly, if Sarah keeps the dollar 200 for a cell phone and Melissa contributes to the project, their combined benefit would be dollar 500; this is shown in the lower left cell of the table. Fill in the right-hand column of the table. Of the four cells of the table, which gives the greatest combined benefits to Sarah and Melissa? When neither Sarah nor Melissa contributes to the building mural When both Sarah and Melissa contribute to the building mural When Sarah contributes to the building mural and Melissa doesn't, or vice versa Now, consider the incentive Sarah faces individually. The following table looks similar to the previous one, but this time, it contains the individual benefit data for Sarah only. As shown previously, if both Sarah and Melissa contribute to a public good, Sarah receives a benefit of dollar 300. On the other hand, if Melissa contributes to the building mural and Sarah does not, Sarah receives a benefit of dollar 350. Fill in the right-hand column of the table with the benefits Sarah gets from each outcome. If Melissa decides to contribute to the building mural, Sarah would maximize her benefit by choosing to not contribute to the building mural. On the other hand, if Melissa decides not to contribute to the building mural, Sarah would maximize her benefit by choosing to not contribute to the building mural. These results illustrate

Explanation / Answer

Melissa

Contribute Do NOt COntribute

Contribute 600 500

Sarah

Do Not contribute 500 400

The highest benefit when both Sarah and Melissa contributes.( Option B)

Individual Sarah decesion - Complete pay offs by filling $150 in upper panel , $200 in lower panel.

Not Contributing, Not contributing

Sarah dominant strategy is to not contribute.

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