ps09_sol

# ps09_sol - Q1 The least costly solution to the external...

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Q1) The least costly solution to the external cost is for A) Curly to endure Moe’s snoring. B) Both to live alone. C) Moe to eliminate his snoring. D) Moe to find a fellow snorer to live with. E) Moe to pay Curly for his discomfort. Ans: C

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According to the background information: One-bedroom flat is \$500/month. Two-bedroom flat is \$800/month. Moe has a seriously snoring problem. Curly values a good night’s sleep at \$150/month. Snore-eliminating device costs \$50/month.
There are 3 possible ways for Curly and Moe to arrange for their accommodation. 1. Each rents a 1-bedroom flat, costing them \$1000/month in total. 1. Curly and Moe share a 2-bedroom flat while Curly cannot sleep well. This costs them \$950/month in total (800 + 150). 1. Curly and Moe share a 2-bedroom flat. Moe uses a snore-eliminating device, costing them in total \$850/month (800 + 50).

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Of the 3 feasible ways, the 3rd costs them the least. Therefore, the two should become housemates. And, at the same time, Moe should use the device to eliminate his loud snoring.
Q2)Assume that Curly and Moe choose to divide the change in surplus from living together equally, and apply it to their monthly rent payments. As a result, Moe will pay ? /month in rent, and Curly will pay ? /month in rent. A) \$425; \$425. B) \$400; \$400. C) \$350; \$450. D) \$375; \$425. E) Neither amount can be determined. Ans: D

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Calculating the surplus from living together: If Curly and Moe each rents a 1-bedroom flat, they have to pay \$1000/month in total. Now, the rent for a 2-bedroom flat is just \$800/month, so they have saved \$200 in total. However, in order to live together in harmony, a snore-eliminating device has to be bought. Therefore, the total surplus they have together is \$150 (1000 – 800 – 50).
Curly’s maximum willingness to pay for rent in a shared 2-bedroom flat is \$500 - \$75 = \$425. (500-150/2) Because Moe has no problem with his own snoring, his maximum willingness to pay will be \$375. (500-150/2-50). And so, (D) is the correct answer.

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\$3500 per month to cease development. If Sid accepts Paul’s offer, it would A) Make Paul worse off and Sid better off. B)
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## This note was uploaded on 09/06/2010 for the course FBE ECON1001 taught by Professor Dr.demurger during the Fall '08 term at HKU.

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ps09_sol - Q1 The least costly solution to the external...

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