Allocation of common costs. Mike and Ed are students at Berkeley College. They share an apartment that is owned by Ed. Ed is considering subscribing to an Internet provider that has the following pack ages available:

Mike spends most of his time on the Internet (“everything can be found online now”). Ed prefers to spend his time talking on the phone rather than using the Internet (“going online is a waste of time”). They agree that the purchase of the $55 total package is a “win—win” situation.

1. Allocate the $55 between Mike and Ed using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method.

2. Which method would you recommend they use and why?

Transcribed Image Text:

Package A. Internet access B. Phone services C. Internet access Per Month $40 20 55 + phone services