Felix and Larry are considering contributing toward the creation of a botanical garden. Each can choose whether
Question:
Felix and Larry are considering contributing toward the creation of a botanical garden. Each can choose whether to contribute $300 to the botanical garden or to keep that $300 for a new suit. Since a botanical garden is a public good, both Felix and Larry will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.90 of benefit. For example, if both Felix and Larry choose to contribute, then a total of $600 would be contributed to the botanical garden. So, Felix and Larry would each receive $540 of benefit from the botanical garden, and their combined benefit would be $1,080. This is shown in the upper left cell of the first table. Since a new suit is a private good, if Felix chooses to spend $300 on a new suit, Felix would get $300 of benefit from the new suit and Larry wouldn't receive any benefit from Felix's choice. If Felix still spends $300 on a new suit and Larry chooses to contribute $300 to the botanical garden, Felix would still receive the $270 of benefit from Larry 's generosity. In other words, if Felix decides to keep the $300 for a new suit and Larry decides to contribute the $300 to the public project, then Felix would receive a total benefit of, Larry would receive a total benefit of $270, and their combined benefit would be $840. This is shown in the lower left cell of the first table.
Complete the following table, which shows the combined benefits of Felix and Larry as previously described.
Larry | |||
Contributes | Doesn’t contribute | ||
Felix | Contributes | $1,080 | |
Doesn’t contribute | $840 | ||
Of the four cells of the table, which gives the greatest combined benefits to Felix and Larry ?
When both Felix and Larry contribute to the botanical garden
When neither Felix nor Larry contributes to the botanical garden
When Felix contributes to the botanical garden and Larry doesn't, or vice versa
Now, consider the incentive facing Felix individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Felix. As shown previously, if both Felix and Larry contribute to a public good, Felix receives a benefit of $540. On the other hand, if Larry contributes to the botanical garden and Felix does not, Felix receives a benefit of $570.
Complete the right-hand column of the following table which shows the individual benefits of Felix.
Hint: You are not required to consider the benefit of Larry .
Larry | |||
Contribute | Don’t contribute | ||
Felix | Contribute | $540, -- | , -- |
Don’t contribute | $570, -- | , -- | |
If Larry decides to contribute to the botanical garden, Felix would maximize his benefit by choosing to to the botanical garden. On the other hand, if Larry decides not to contribute to the botanical garden, Felix would maximize his benefit by choosing to to the botanical garden.
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