Table 11-5
A small strip mall contains four retail stores, and crime has recently been on the increase in the neighborhood of the strip mall. The owners of the four stores - Stores A, B, C, and D - are considering contributing to a pool of money that will be used to hire up to 4 security guards. The table represents their willingness to pay, that is, the maximum amount that each store owner is willing to contribute, per day, to hire each security guard.

-Refer to Table 11-5.Suppose the cost to hire each individual guard is $100 per day.How many guards should be hired to maximize the total surplus of the four store owners?
A) 1
B) 2
C) 3
D) 4

Question

Table 11-5
A small strip mall contains four retail stores, and crime has recently been on the increase in the neighborhood of the strip mall. The owners of the four stores - Stores A, B, C, and D - are considering contributing to a pool of money that will be used to hire up to 4 security guards. The table represents their willingness to pay, that is, the maximum amount that each store owner is willing to contribute, per day, to hire each security guard.
 
-Refer to Table 11-5.Suppose the cost to hire each individual guard is $100 per day.How many guards should be hired to maximize the total surplus of the four store owners?
A) 1 
B) 2 
C) 3 
D) 4

Quizplus · Accepted Answer

To maximize the total surplus of the four store owners, we need to hire security guards up to the point where the total willingness to pay (TWTP) equals the total cost of hiring the guards. The TWTP for 1 guard is $680, for 2 guards it is $1280, for 3 guards it is $1800, and for 4 guards it is only $2200, which is less than the total cost of $400 ($100 per guard x 4 guards). Therefore, 4 guards should not be hired. The highest TWTP that is less than the cost of 3 guards ($300) is $280, which means that only Stores A, B, and C are willing to pay for 3 guards. Store D is only willing to pay $60 for 3 guards, so it can be excluded. Therefore, 3 guards should be hired, and their cost ($300) will be covered by Stores A, B, and C, resulting in a total surplus of $500 (TWTP of $1800 - cost of $300).

Table 11-5 A Small Strip Mall Contains Four Retail Stores, and Crime