3. Voluntary contributions toward a public good Ana and Dina are considering con
ID: 1105188 • Letter: 3
Question
3. Voluntary contributions toward a public good Ana and Dina are considering contributing toward the creation of a botanical garden. Each can choose whether to contribute $300 to the botanical garden or to keep that $300 for a cell phone. Since a botanical garden is a public good, both Ana and Dina will benefit from any contributions made by the other person. Specifically, every dolar that either one of them contrbutes w bring each of them $0.70 of benefit. For example, if both Ana and Dina choose to contribute, then atotal of $600 would be contributed to the botanical garden. So, Ana and Dina would each receive $420 of benefit from the botanical combined benefit would be $840This is shown in the upper left cell ofthe frst table. garden, and their Since a cell phone is a private good, if Ana chooses to spend $300 on a cell phone, Ana would get $300 of benefit from the cell phone and Dina wouldn't receive any benefit from Ana's choice. If Ana still spends $300 on a cell phone and Dina chooses to contribute $300 to the botanical garden, Ana would stil receive the $210 of benefit from Dina's generosity. In other words, if Ana decides to keep the $300 for a cell phone and Dina decides to contribute the $300 to the public project, then Ana would receive a total benefit of $300+S210-$310, Dina would receive a total benefit of $210, and their combined benefit would be $720. This is shown in the lower left cell of the first table Complete the following table, which shows the combined benefits of Ana and Dina as previously descnibed Conibutes Doesn't contribue Doe contb $720 Of the four celis of the table, which gives the greatest combined benefits to Ana and Dina? 6Explanation / Answer
1. When dina doesn't contribute and ana Contribute:
dina , get benefit of 300 which he spend on new suit and $ 210 i.e. 0.70 of $ 300 which Ana spend on public good. So, total benefit received by dina = 300 + 210 = $ 510
Ana gets benefit of $ 210 only.
Total benefit = $ 510 + $ 210 = $ 720
2. When dina and ana do not contribute.
Both will get benefit of $ 300 which they spend on new suit. So, total benefit = $ 600
3. When both Ana and dina contribute to the botanical garden.
4. Ana benefit when dina doesn't contribute: 0.70 of Ana investment X 300 = $ 210
5. Ana benefit when dina and she don't contribute: $ 300
6. Not to contribute
7. Not to contribute
8. The creation of the positive externality
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