Question

A local college is deciding whether to conduct a campus beautification initiative that would involve various projects, such as planting trees and remodeling buildings, to make the campus more aesthetically pleasing. For the students of the college, the visual appearance of the campus is non-rival and non-excludable. Thus, the visual appearance would be classified as a public good.

Suppose the college administrators estimate that the beautification initiative will cost $5,200. To decide whether the initiative should be undertaken, administrators conduct a survey of the college's 300 students, asking each of them their willingness-to-pay for the beautification project. The average willingness-to-pay, as revealed by the survey, is $13.

The benefit of the beatification initiative, as suggested by the survey, is $_____ . Because the estimated benefit is LESS/GREATER than the cost, the college administrators SHOULD NOT/SHOULD undertake the beautification initiative.

The calculation of the benefit of the beatification initiative relied on the ability of the administrators to accurately capture the true willingness-to-pay of each student.

Which of the following scenarios would cause the survey used by the college administrators to yield misleading willingness-to-pay data? Check all that apply.

Students believe that if the initiative does not happen, the funds for the initiative will not be spent elsewhere.

Students are surveyed at random, using conventional survey and data-gathering methods.

Answers needed are bolded:

1. $ Monetary amount

2. LESS/GREATER

3. SHOULD NOT/SHOULD

4.

Students believe that if the initiative does not happen, the funds for the initiative will not be spent elsewhere.

Students are surveyed at random, using conventional survey and data-gathering methods.

Answer 1

The benefit of the beautification initiative, as suggested by the survey = $3900.

Explanation = The benefit of the beatification = Number of students * willingness to pay = 300*13 = 3900

Because the estimated benefit is LESS than the cost, the college administrators SHOULD NOT undertake the beautification initiative.

Misleading willingness-to-pay data may occur because:

Students believe that if the initiative does not happen, the funds for the initiative will not be spent elsewhere.

Explanation: Suppose that the students believe that if the initiative does not happen, the funds for the initiative will be spent elsewhere. In that case, they would have reported a higher willingness to pay to ensure that the funds are spent on beautification.

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