Table 11-2
Consider a small town with only three families, the Greene family, the Brown family, and the Black family. The town does not currently have any streetlights so it is very dark at night. The three families are considering putting in streetlights on Main Street and are trying to determine how many lights to install. The table below shows each family's willingness to pay for each streetlight.
-Refer to Table 11-2. Suppose the cost to install each streetlight is $900. How many streetlights should the town install to maximize total surplus from the streetlights?
A)1 streetlight
B)2 streetlights
C)3 streetlights
D)4 streetlights

Question

Table 11-2
Consider a small town with only three families, the Greene family, the Brown family, and the Black family. The town does not currently have any streetlights so it is very dark at night. The three families are considering putting in streetlights on Main Street and are trying to determine how many lights to install. The table below shows each family's willingness to pay for each streetlight. 
-Refer to Table 11-2. Suppose the cost to install each streetlight is $900. How many streetlights should the town install to maximize total surplus from the streetlights?
A)1 streetlight 
B)2 streetlights 
C)3 streetlights 
D)4 streetlights

Quizplus · Accepted Answer

To maximize total surplus, we want to install streetlights up to the point where the marginal cost equals the marginal willingness to pay of the last consumer. In this case, installing 1 streetlight would generate a total surplus of $400 (Greene's WTP), installing 2 streetlights would generate a total surplus of $800 (Brown's WTP), and installing 3 streetlights would generate a total surplus of $900 (Black's WTP). However, installing 4 streetlights would incur a cost of $3600 ($900 x 4) while only generating a total surplus of $900 (the highest WTP). Therefore, we should install 2 streetlights to maximize total surplus while minimizing costs.

Table 11-2 Consider a Small Town with Only Three Families, the Greene