Suppose you run a charity that raises money for a worthy public good. Your donors may be concerned about how much of each dollar that is raised is put back into more fund-raising. a. Suppose the marginal product of a dollar put into fundraising is initially increasing but eventually diminishing. How much will the last dollar spend on fundraising raise?

Question

b. If everyone considers their own contribution to this charity as the marginal contribution, what will be their impression of how much they are really helping the public good?
c. Would you expect your answer to (b) to make it harder for you to raise money for your charity?
d. How might your answer to (c) explain why some charities make a point of informing people that they have placed a cap on their fund raising budget -- or that they have placed a cap on how many people will be approached during the fund raising campaign?

What will be an ideal response?

Answer 1

a.  The last dollar spent will raise about a dollar.

b.  Their impression will be that 100% of their contribution is being put into fund-raising, and none into the public good.

c.  One would expect that this makes fund-raising harder.

d.  One way around the problem is to signal that you will stop fund-raising before you get to the point where the marginal product of a dollar is a dollar. You can do this in either of the proposed ways.