Figure 5-16

Amit and Bree are the only two homeowners on an isolated private road. Both agree that installing street lights along the road would be beneficial and want to do so. Figure 5-16 shows their willingness to pay for different quantities of street lights, the market demand for street lights, and the marginal cost of installing the street lights.
-Refer to Figure 5-16.What is the optimal quantity of street lights to install?
A)3
B)4
C)6

Question

Figure 5-16
  
Amit and Bree are the only two homeowners on an isolated private road. Both agree that installing street lights along the road would be beneficial and want to do so. Figure 5-16 shows their willingness to pay for different quantities of street lights, the market demand for street lights, and the marginal cost of installing the street lights.
-Refer to Figure 5-16.What is the optimal quantity of street lights to install?
A)3 
B)4 
C)6

Quizplus · Accepted Answer

The optimal quantity of street lights to install is where the marginal cost (MC) equals the marginal benefit (MB) or where the demand curve intersects the MC curve. This occurs at a quantity of 6 street lights. At this quantity, both Amit and Bree are willing to pay $20 each, resulting in a market demand of $40. The marginal cost of installing the 6th street light is also $40. Therefore, installing 6 street lights maximizes the total surplus (benefits minus costs) for both homeowners.

Figure 5-16 Amit and Bree Are the Only Two Homeowners on an Only