Question

At a sightseeing point, reachable only after a strenuous hike, a firm has established a stand where bottled water is sold. The water, carried in by the employees of the firm, is sold to thirsty hikers in 6-ounce bottles. The price is $1 per bottle. Typically only 100 bottles of the water are sold each day. On a particularly hot day, however, 200 hikers each want to buy at least one bottle of water. You will find below four different means of distributing the water. Indicate your answer to all four options with one of the possible answers and explain your reasoning:  [Keep the following in mind as you think about the answers. One, don't necessarily put yourself in the place of the owner of the water stand nor in the place of the hikers. Just think about what would be the best way of getting the most water to the most number of people, in both the short term and long term.]

Option 1: Increase the price until the quantity of water bottles that hikers are willing and able to purchase exactly equals the number of water bottles available for sale.

1. Agree completely
2. Agree with slight reservation
3. Disagree
4. Strongly disagree
5. Totally unacceptable

Option 2: Selling the water for $1 per bottle on a first-come, first-served basis.

1. Agree completely
2. Agree with slight reservation
3. Disagree
4. Strongly disagree
5. Totally unacceptable

Option 3: Having the local government buy the water for $1 per bottle and distribute it according to its own judgment.

1. Agree completely
2. Agree with slight reservation
3. Disagree
4. Strongly disagree
5. Totally unacceptable

Option 4: Selling the water for $1 per bottle to a random selection of hikers.

1. Agree completely
2. Agree with slight reservation
3. Disagree
4. Strongly disagree
5. Totally unacceptable

Answer 1

Option 1:a. Agree completely. The most thirsty hikers will have the greatest amount of marginal utility, they will be willing to pay the highest price for the bottle of water. Selling the bottle of water in this manner will help the more thirsty hikers get water to drink. It will also help the firm earn the maximum amount of revenue.

Option 2:c. Disagree. The thirstiest hiker may not be able to get to drink a bottle of water. Also, the firm will earn $100 only, that is the revenue that it earns on a normal day. The firm will not be able to maximise its revenue in this manner.

Option 3: d. Strongly disagree. The firm ends up earning the revenue that it earns on a normal day. The judgement of the local government cannot be trusted. It may end up favouring some hikers, that is unfair to the other hikers who are willing to pay $1 for the bottle of water, but do not get to buy the bottle of water.

Option 4: c. Disagree. The thirstiest hiker may not be able to get to drink a bottle of water. Also, the firm will earn $100 only, that is the revenue that it earns on a normal day. The firm will not be able to maximise its revenue in this manner.