E202Solutions8.2

E202Solutions8.2 - 6 John and Karl can live together in 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. Answer : John and Karl stand to save $200/mo in rental payments by living together. The lowest- cost accommodation to the dirty dish problem is for John to leave his dirty dishes in the sink. Under that arrangement, the maximum monthly rent Karl would be willing to pay to share an apartment with John is $350 - $175 = $175/mo. That amount would leave John with a remaining monthly rent bill of $325, which generates a social surplus of $25/mo. If John splits this surplus
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This note was uploaded on 02/20/2012 for the course ECON 202 taught by Professor Brightwell during the Spring '08 term at Texas A&M.

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