Four roommates are planning to spend the weekend in their dorm room watching old

Question

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) Darnell Jacques Musashi Searn First film Second film Third film Fourth film Fifth film 10 Within the dorm room, the showing of a movie a public good. movies in order to maximize the total surplus. If it costs $12 to rent a movie, the roommates should rent Suppose the roommates choose to rent the optimal number of movies you just indicated and then split the cost of renting equally.

Explanation / Answer

Within the dorm room, the showing of a movie is a public good. ( it is non excludable and non rival)

If it costs $12 to rent a movie, the roommates should rent 3 movies in order to maximize the total surplus. (total willingness to pay should be greater than or equal to rent of movie )

If 3 movies are rented, total cost is 36. So each will pay $9.

If splitting of costs is according to beneifts, each will have incentive to understate true value.

When Darnell is asked his willingness to pay, he will have an incentive to tell the truth. True

This examples teaches you that the optimal provision of a public good will occur if individuals do not have an incentive to hide their valuation of the good.

Roomates Willingless to pay Consumer Surplus Darnell 24 15 Jaques 21 12 Musahi 18 9 Sean 6 -3

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