Your friend has just received a new book he ordered and you want to borrow it. Your friend values reading the book at $10, while you are willing to pay a maximum amount of $15 to read it
a) What is the equilibrium outcome in this case? b) Will the outcome be any different if you own a book that your friend wants to read? Assume that the value that each of you places on this book is the same as that you placed on the previous book.
a) Because your friend owns the book and values reading it at $10 while you value reading it at $15, an efficient outcome can be reached if you decide to give an amount between $10 and $15 to your friend in exchange for the book. Your friend will be better off as he will get an amount higher than his valuation for the book, and you will be better off as you will have to pay an amount lower than your maximum willingness to pay for the book. Therefore, this equilibrium is efficient. However, the exact amount that you will have to pay will depend on your bargaining power.
b) In this case, an efficient outcome is possible if your friend has a higher value for the book than you. If your friend has a higher valuation for reading the book than you do, he will pay you an amount higher than your valuation for the book and lower than the value he assigns to reading the book.
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What will be an ideal response?