Kris, Taylor and Max are the only three residents in a neighborhood. A public good that would benefit all of them has a one-time installation cost of $900. The value of the public good to each resident is shown in the table below. Any tax plan must be approved by simple majority. $$\begin{array} { | c | c | c | }
\hline \text { Resident } & \text { Reservation Price } & \text { Income } \
\hline \text { Kris } & \$ 100 & \$ 1,000 \
\hline \text { Taylor } & \$ 200 & \$ 5,000 \
\hline \text { Max } & \$ 700 & \$ 6,000 \
\hline
\end{array}$$ Installing the public good would ______ total economic surplus by ______.

Question

Kris, Taylor and Max are the only three residents in a neighborhood. A public good that would benefit all of them has a one-time installation cost of $900. The value of the public good to each resident is shown in the table below. Any tax plan must be approved by simple majority. $$\begin{array} { | c | c | c | } 
\hline \text { Resident } & \text { Reservation Price } & \text { Income } \
\hline \text { Kris } & \$ 100 & \$ 1,000 \
\hline \text { Taylor } & \$ 200 & \$ 5,000 \
\hline \text { Max } & \$ 700 & \$ 6,000 \
\hline
\end{array}$$ Installing the public good would ______ total economic surplus by ______.

Quizplus · Accepted Answer

Installing the public good would increase the total economic surplus by $100. To determine this, we need to calculate the total willingness-to-pay for the public good, which is the sum of the reservation prices for each resident:

Kris: $100 
Taylor: $200 
Max: $700

Total willingness-to-pay = $1,000

The total cost of the public good is $900, which is less than the total willingness-to-pay. Therefore, installing the public good would increase the total economic surplus, which is the difference between the total willingness-to-pay and the total cost.

Total economic surplus = Total willingness-to-pay - Total cost 
= $1,000 - $900 
= $100

Therefore, choice A is the best choice.

Kris, Taylor and Max Are the Only Three Residents in a Neighborhood