Econ 232 Public Finance, Foldvary

Demand Revelation

Problem Set question #5, 20 pts., due Oct. 31

The university has put you in an apartment with three roommates.
You did not know them before.

You are deciding whether to buy a TV for the living room.

It costs \$400. If they buy it, each would by prior agreement pay \$100.

Nobody trusts the others to tell the truth about how much each values the TV.

They have previously agreed to use demand revelation for such decisions.

Suppose these are the true personal values of the TV for the 4 residents, A B C D:

A would be willing to pay at most \$90

B would pay at most \$220 (he would watch a lot).

C would pay at most \$0 (zero) for the TV (he would not watch at all).

D would pay at most \$150.

1. (5 pts.) Explain in detail how demand revelation theory makes each person reveal his true subjective value of the TV.

2. (1 pt.) Should they buy the TV, i.e. is it economically rational and efficient to buy it? Why?

3. (8 pts) If they use the demand-revealing method, what is the payment of each, for the TV and what are any additional payments?

4. (3 pt.) Do you know of a method of social choice superior to demand revelation when we don’t trust people to tell the truth?
If so, what is it? Why is it superior?
If not, do you think demand revelation is the best way to decide on a public goods in such a case? Explain.

5. (3 pts.) What would have been the outcome if they just held a vote?

Is the demand revealing method superior to voting? Why or why not?