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E202ProblemSet8.2 - use this money either to buy a...

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6. John and Karl can live together in a two-bedroom apartment for $500 per month, or each can rent a single-bedroom apartment for $350 per month. Aside from the rent, the two would be indifferent between living together and living separately, except for one problem: John leaves dirty dishes in the sink every night. Karl would be willing to pay up to $175 per month to avoid John’s dirty dishes. John, for his part, would ne willing to pay up to $225 to be able to continue his sloppiness. Should John and Karl live together? If they do, will there by dirty dishes in the sink? Explain. 7. How, if at all, would your answer to Problem 6 differ if John would be willing to pay up to $30 per month to avoid giving up his privacy by sharing quarters with Karl? 10. A village has six residents, each of whom has accumulated savings of $100. Each villager can
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Unformatted text preview: use this money either to buy a government bond that pays 15 percent interest per year or to buy a year-old llama, send it onto the commons to graze, and sell it after one year. The price the villager gets for the 2-year-old llama depends on the quality of the fleece it grows while grazing on the commons. That in turn depends on the animal’s access to grazing, which depends on the number of llamas sent to the commons, as shown in the following table: Number of llamas on the commons Price per 2-year-old llama ($) 1 122 2 118 3 116 4 114 5 112 6 109 The villagers make their investment decisions one after another, and their decisions are public....
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