Temple University
Department of Economics

Economics 52
Principles of Microeconomics

Name Key

Ned and Fred would like to hire a cleaning service to clean their apartment each week.  The value of the cleaning is $35 to Ned and $100 to Fred.  Regardless of who pays for the service, the entire apartment gets cleaned.

a.      What is the most the cleaning service can charge per week and still be assured of being hired by one of them? $100

Suppose the competitive fee for the cleaning service is $80 per week.

b. The owner of the apartment complex proposes that each of you pay 50% of the weekly fee.  Will you and your roommate agree to the landlord's proposal?  Yes   No No, since Ned values the service at only $35.

c. When it is priced at $80 is total economic surplus higher with the cleaning service?  Yes  No Yes, Value to Fred and Ned = 100+35 = 135.  The cost of the service is $80, so the net is $55.

d. Will Ned ever take it upon himself to hire the cleaning service if Fred refuses to contribute? Yes  No No

e. Will Fred ever hire the cleaning service if Ned refuses to contribute? Yes  No Yes.

f. Fred tells Ned that he will not hire the cleaning service unless Ned contributes.  What will be the net cost to Fred of the cleaning service?  $45