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. DongJu Dinh SangMin HyungSeok First film $7 $5 $3 $2 Second film 6 4 2 1 Third film 5 3 1 0 Fourth film 4 2 0 0 Fifth film 3 1 0 0 1) Within the dorm room, is the showing of a movie a public good? Why or why not? 2) If it costs $8 to rent a movie, how many movies should the roommates rent to maximize total surplus? 3) If they choose the optimal number from part 2) and then split the cost of renting the movies equally, how much surplus does each person obtain from watching the movies? 4) Is there any way to split the cost to ensure that everyone benefits? What practical problems does this solution raise? 5) Suppose they agree in advance to choose the efficient number and to split the cost of the movies equally. When DongJu is asked his willingness to pay, will he have an incentive to tell the truth? If so, why? If not, what will he be tempted to say? 6) What does this example teach you about the optimal provision of public goods?
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.
|
|
DongJu |
Dinh |
SangMin |
HyungSeok |
|
First film |
$7 |
$5 |
$3 |
$2 |
|
Second film |
6 |
4 |
2 |
1 |
|
Third film |
5 |
3 |
1 |
0 |
|
Fourth film |
4 |
2 |
0 |
0 |
|
Fifth film |
3 |
1 |
0 |
0 |
1) Within the dorm room, is the showing of a movie a public good? Why or why not?
2) If it costs $8 to rent a movie, how many movies should the roommates rent to maximize total surplus?
3) If they choose the optimal number from part 2) and then split the cost of renting the movies equally, how much surplus does each person obtain from watching the movies?
4) Is there any way to split the cost to ensure that everyone benefits? What practical problems does this solution raise?
5) Suppose they agree in advance to choose the efficient number and to split the cost of the movies equally. When DongJu is asked his willingness to pay, will he have an incentive to tell the truth? If so, why? If not, what will he be tempted to say?
6) What does this example teach you about the optimal provision of public goods?
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