Table 11-2
Consider a small town with only three families, the Johnson family, the Marshall family, and the Walker 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 $450.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 Johnson family, the Marshall family, and the Walker 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 $450.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 from the streetlights, the town should choose the quantity of streetlights at which the sum of the marginal willingness to pay of each family is equal to the marginal cost of providing streetlights. The total marginal willingness to pay for the first streetlight is $1,250, which is greater than the marginal cost of $450. The total marginal willingness to pay for the second streetlight is $900, which is also greater than the marginal cost of $450. Therefore, the town should install two streetlights, which will result in a total surplus of $1,250 + $900 - $450 - $450 = $1,250. Installing more than two streetlights will not increase the total surplus, as the marginal cost would exceed the total marginal willingness to pay.

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