Question

There are 1000 people in the small town of Pohdunk, who want to have a fireworks display on the 4th of July. Willingness to pay for each of the 100 individuals is P = 5.52 – 0.01Q, where Q is the number of colorful exploding rockets that shoot off during the display. The cost of each colorful exploding rocket is $20.

a) How many rockets should the town of Pohdunk purchase for its fireworks display?

b) How much should the town charge each individual in order to maximize consumer surplus?

c) Explain why it is unlikely that the optimal amount of rockets will be purchased no matter what system of payment is used.   

Answer 1

c) The optimal amount will not be purchased because there will remaina possibility to free ride once the good is being provided. Then there will be less willingness to pay which will not cover the cost.