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)
	Eric	Kenji	Paolo	Van
First film	10	9	8	3
Second film	8	7	6	2
Third film	6	5	4	1
Fourth film	4	3	2	0
Fifth film	2	1	0	0

Within the dorm room, the showing of a movie ( IS OR IS NOT ) a public good.

If it costs $12 to rent a movie, the roommates should rent ______?______movies in order to maximize the total surplus.

Suppose the roommates choose to rent the optimal number of movies you just indicated and then split the cost of renting equally.

This means that each roommate will pay $_____?______.

Complete the following table with each roommate's total willingness to pay for this many movies and the surplus each person obtains from watching the movies.

Roommate	Total Willingness to Pay	Consumer Surplus
	(Dollars)	(Dollars)
Eric	________	________
Kenji	________	________
Paolo	________	________
Van	________	________

In order to split the cost in a way that ensures that everyone benefits, the cost could be divided up based on the benefits each roommate receives.

The practical problem with this solution is that each roommates has an incentive to ( UNDERSTATE OR OVERSTATE ) the value of the movies to him.

Suppose they agree in advance to choose the efficient number and to split the cost of the movies equally.

True or False: When Eric is asked his willingness to pay, he will have an incentive to understate the value of the movies to him.

True

False

This examples teaches you that the optimal provision of a public good will occur if individuals ( DO HAVE OR DONT HAVE ) an incentive to hide their valuation of the good.

Answer 1

Answer to blank 1: is

Explanation:

Because if one roommate’s viewing a movie, it does not affect the ability of other roommates to view the movie. Here, the good is nonrival in consumption.

Answer to blank 2: three

Explanation:

Because the value of the fourth film is $9 (i.e. $4 + $3 + $2 + $0) would be less than the cost of the movie (i.e. $12).

Answer to blank 3: $9

Explanation:

Total Cost of 3 movies = $12 * 3 = $36

Each roommate will pay = $36 / 4 = $9

Roommate	Total Willingness to Pay	Consumer Surplus
	(Dollars)	(Dollars)
Eric	24 (i.e. 10 + 8 + 6)	15 (i.e. 24 - 9)
Kenji	21 (i.e. 9 + 7 + 5)	12 (i.e. 21 - 9)
Paolo	18 (i.e. 8 + 6 + 4)	9 (i.e. 18 - 9)
Van	6 (i.e. 3 + 2 + 1)	-3 (i.e. 6 - 9)

Answer to blank 4: Understate

Explanation:

Because Eric values the movies the most, he would pay the greatest share. This gives each roommate an incentive to understate the value of the movies to him.

Answer to blank 5: True

Explanation:

Because they are going to pay equal shares, Eric has an incentive to tell the truth about the value he places on movies.

Answer to blank 6: Do not have