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:
Orson Alfred Woody Ingmar
Frist 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
b. If it costs $8 to rent a video, how many videos should the roommates rent to
maximize total surplus?
c. If they choose the optimal number from part (b) and then split the cost of
renting the videos equally, how much surplus does each person obtain from
watching the movies?
f. What does this example teach you about optimal provision of public goods?
A MARKET IN WHICH NO ONE CONTROLS THE PRICES IS CALLED
A competitive market.
b) Sum the prices for each person's willingness to pay for each movie. E.g., for the first movie, they would pay $17. This $17 is the marginal gross benefit from the first movie. Keep renting movies until while the marginal benefit exceeds the marginal cost of $8. I calculate they rent 3 movies.
c) 3 movies at $8 each is $24. Divided 4 ways is $6 each. Orsen's total NET benefit is $7+$6+$5 - $6. Do the same for the everybody else.
f) Take a shot.
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A MARKET IN WHICH NO ONE CONTROLS THE PRICES IS CALLED
1 answer
1 answer