Phil owns a vacation cottage, and is considering the option of bringing electricity to the cottage. If he does, he can buy electricity for $.10 per kilowatt hour. The Public Utilities Company wants to charge Phil $2,000 for the electrical hook- up, but Phil's reservation price is only $1,500. This question concerns the measurement of the benefit to Phil for the privilege of buying electricity at
$.10 per kilowatt hour. Which of the following is true?
A)EV = $1,500
B)CV = $2,000
C)CS = $2,000
D)CV = $1,500

Question

Quizplus · Accepted Answer

The benefit to Phil for the privilege of buying electricity at $.10 per kilowatt hour is the difference between the cost of electricity with and without the electrical hook-up. Therefore, his reservation price of $1,500 represents the maximum amount he is willing to pay for the hook-up. Hence, CV (reservation price) = $1,500.

Phil Owns a Vacation Cottage, and Is Considering the Option