Microecons

[jxnis]

Suppose there are three houses in a neighbourhood. The residents are considering improving security in the neighbourhood after there has been in an increase in crime in the city they live in. They are deciding on how many security cameras that need to be installed. Each resident's willingness to pay for security cameras is given in the table below.


Number of
Cameras House 1 House 2 House 3

1 $300 $400 $200
2 $280 $360 $160
3 $240 $300 $120
4 $180 $220 $100
5 $80 $100 $10

If the cost of installing one camera is $500, how many cameras will be installed?

[JJ109]

Basic Utility Theory states that a consumer will continue to buy product whilst Marginal Utility exceeds price

The Marginal (Total) Utility of 1 camera = 300 + 400 + 200 = 900
The MU (2 cameras) = 280+ 360 +160 = 800
The MU (3 cameras) = 240 + 300 + 120 = 660
The MU (4 cameras) = 180 +220 + 100 = 500
The MU (5 cameras) = 80 + 100 + 10 = 190

Clearly 3 cameras Marginal utility (660) > Cost (500) but if you add another (4th) camera the Marginal Utility reduces to only 500 which equals the cost. As it does not EXCEED the cost, the 4th camera will not be bought.

Answer 3 cameras will be bought

This information should now be sufficient for you to answer your other two questions by yourself.