Question

Five students share and apartment and all enjoy music equally. The marginal utility of each student is MU(Q) = 5 − 1 50 Q where Q is the number of CD’s in the apartment. Assume that a CD is a pure public good, namely it can be enjoyed but all and nobody in the apartment can be excluded from listening to it even if s(h)e has bought it. ) The cost of a CD is $4. What is the socially optimal number of CD’s in the apartment?

Answer 1

The socially optimal quantity of CD is at the point where the marginal benefit or marginal utility is equal to the marginal cost.

$5 − Q=4\\[0.3cm] Q=5-4\\[0.3cm] Q=1$

The optimal number of CDs in the apartment is 1 CD.