Question

Public Goods: Four roommates are planning to spend the weekend in their dorm room watching pay per view movies, and they are debating how many to watch. The following gives their willingness to pay (marginal benefit) for each film: Ang Greta Shonda J.J. First film $8 $5 $4 $2 Second film $6 $4 $2 $1 Third film $5 $3 $1 $0 Fourth film $1 $2 $0 $0 Fifth film $0 $1 $0 $0 Anyone in the room is able to watch a movie that is shown in the room, regardless of whether they helped pay for it, since as a roommate they are free to be in the room while it is on. Given this information, answer the following as briefly as possible:

Greta Shonda First film Second film Third film Fourth film Fifth film

a. Within the dorm room, is the showing of a movie a public good? Why or why not?

b. If it costs $8 for a movie, how many movies should the roommates purchase to maximize their total surplus?

c. If they choose the optimal number from part (b) and then split the cost of buying the movies equally, how much surplus does each person obtain from watching the movies? What would be the total surplus from buying the optimal number of movies?

d. Is there any way to split the cost of the optimal number of movies to ensure that everyone benefits? How could Ang benefit from misrepresenting his willingness to pay?

e. Suppose they agree in advance to choose the efficient number and split the cost of the movies equally. When Ang is asked his willingness to pay, will he have an incentive to lie in this scenario? If so, what might he say. If not, why?

Answer 1

a) from viewing the movie, none of the wing the movie, none of the roommates can be exclucied, Because one room mate's viewing cloes not affect the ability of another roommate to view the movie, the good is also non ruval in consumption. Therefore, within the dorm room, the showing of a movie is a public good. 3) The rame of the fourth film ($3) would be less than the colt f ( $8) So, the roommates Should Hent three movies. The total cost would be $8x 3 = $24. If the cont were divided evenly among the roommates, each one of them it would pay $6 = Ang value three movies at $19 20 his surplus would be $13. Gireeta values three movies at $12 So his 'surplus would be $6. Shonda values three movies at $7, So his surplues would be $1. J.J values three movies at $3 So his lwyplies is - $3. Total Surplus among the roommates would be $17. Ang values the movies the most , he would pay the greatest chare, as the cous could be dinicled up the by the rommates based on the benefits they reciere. Ang can under tale the vale o the movies to him to minimize the cost and increase the "Surpluu.