Proposed additional problem for U.C. Berkeley Econ 1, Fall 2010, Problem Set 5:
12) Let us now leave Euphoric State and the town of Avicenna. Let us drive across the bridge over the bay to the city of Holy Frank. And then let us drive 50 miles south along the Royal Road to the town of Old Stick. In Old Stick we find Crony Capitalism University--endowed by one of the early governors of Euphoria with money he diverted from the railroad connecting the state of Euphoria with the outside world.
Let us say that every year 1000 freshmen arrive at CCU and all immediately think about buying a BMW convertible. They are, you see, mostly from Angel-Queen City and have not walked anywhere since they started kindergarten. CCU is half a long mile in the Euphoric sun down an avenue of palm trees from even the shops of Old Stick. Suppose that the selling price of BMW convertibles is $55,000. Suppose that each of the 1000 freshmen thinks that the value of a BMW convertible as transportation is $50,000. But there is a catch. Each student who owns a BMW convertible feels $10 worth of utility happier--call it spite--for each of his or her 1000 peers who does not own a BMW convertible. Each student who does not own a BMW convertible feels $10 of utility unhappier--call it envy, or regret--for each of his or her 1000 peers who does own a BMW convertible. Thus the first student to show up would feel no regret if he or she did not buy (for nobody else owns one) but would receive 999 x $10 = $9,990 worth of spite plus $50,000 worth of transportation if he or she were to buy a BMW convertible:
a) Will the first freshman student to show up at CCU buy a BMW convertible?
b) How many of the 1000 freshmen students to show up at CCU will buy BMW convertibles?
c) What will be the total consumer surplus received by the 1000 freshman students of CCU from their purchase of BMW convertibles?
d) Suppose that there is ample parking around CCU--this is suburban Euphoria, after all--but all of it is on university land. Suppose you are the chair of the Department of Economics at CCU, and the President of CCU asks you how much the university should charge freshmen for parking spaces. What do you think is the right price to charge for parking? And why?