Answered: Complete the following table, which…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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3. Voluntary contributions toward a public good

Sean and Bob are considering contributing toward the creation of a water fountain. Each can choose whether to contribute $300 to the water fountain or to keep that $300 for a weekend getaway.

Since a water fountain is a public good, both Sean and Bob will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.90 of benefit. For example, if both Sean and Bob choose to contribute, then a total of $600 would be contributed to the water fountain. So, Sean and Bob would each receive $540 of benefit from the water fountain, and their combined benefit would be $1,080. This is shown in the upper left cell of the first table.

Since a weekend getaway is a private good, if Sean chooses to spend $300 on a weekend getaway, Sean would get $300 of benefit from the weekend getaway and Bob wouldn't receive any benefit from Sean's choice. If Sean still spends $300 on a weekend getaway and Bob chooses to contribute $300 to the water fountain, Sean would still receive the $270 of benefit from Bob's generosity. In other words, if Sean decides to keep the $300 for a weekend getaway and Bob decides to contribute the $300 to the public project, then Sean would receive a total benefit of $300+$270=$570$300+$270=$570, Bob would receive a total benefit of $270, and their combined benefit would be $840. This is shown in the lower left cell of the first table.

Complete the following table, which shows the combined benefits of Sean and Bob as previously described.

3. Voluntary contributions toward a public good
Sean and Bob are considering contributing toward the creation of a water fountain. Each can choose whether to contribute $300 to the water fountain
or to keep that $300 for a weekend getaway.
Since a water fountain is a public good, both Sean and Bob will benefit from any contributions made by the other person. Specifically, every dollar that
either one of them contributes will bring each of them $0.90 of benefit. For example, if both Sean and Bob choose to contribute, then a total of $600
would be contributed to the water fountain. So, Sean and Bob would each receive $540 of benefit from the water fountain, and their combined benefit
would be $1,080. This is shown in the upper left cell of the first table.
Since a weekend getaway is a private good, if Sean chooses to spend $300 on a weekend getaway, Sean would get $300 of benefit from the weekend
getaway and Bob wouldn't receive any benefit from Sean's choice. If Sean still spends $300 on a weekend getaway and Bob chooses to contribute
$300 to the water fountain, Sean would still receive the $270 of benefit from Bob's generosity. In other words, if Sean decides to keep the $300 for a
weekend getaway and Bob decides to contribute the $300 to the public project, then Sean would receive a total benefit of $300 + $270 = $570, Bob
would receive a total benefit of $270, and their combined benefit would be $840. This is shown in the lower left cell of the first table.
Complete the following table, which shows the combined benefits of Sean and Bob as previously described.
Bob
Contributes Doesn't contribute
Contributes
$1,080
%24
Sean
Doesn't contribute
$840
%24
Of the four cells of the table, which gives the greatest combined benefits to Sean and Bob?
When both Sean and Bob contribute to the water fountain
O When neither Sean nor Bob contributes to the water fountain
When Sean contributes to the water fountain and Bob doesn't, or vice versa
Now, consider the incentive facing Sean individually. The following table looks similar to the previous one, but this time, it is partially completed with
the individual benefit data for Sean. As shown previously, if both Sean and Bob contribute to a public good, Sean receives a benefit of $540. On the
other hand, if Bob contributes to the water fountain and Sean does not, Sean receives a benefit of $570.
Complete the right-hand column of the following table, which shows the individual benefits of Sean.
Hint: You are not required to consider the benefit of Bob.

Complete the right-hand column of the following table, which shows the individual benefits of Sean.
Hint: You are not required to consider the benefit of Bob.
Bob
Contribute
Doesn't contribute
Contribute
$540, --
Sean
Doesn't contribute $570, --
2$
If Bob decides to contribute to the water fountain, Sean would maximize his benefit by choosing
to the water fountain. On the
other hand, if Bob decides not to contribute to the water fountain, Sean would maximize his benefit by choosing
to the water
fountain.
These results illustrate

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