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.
You might also like to view...
The slope of a country's production possibility frontier with cloth measured on the horizontal and food measured on the vertical axis in the Ricardian model is equal to ________ and it ________ as more cloth is produced
A) -MPLF/MPLC; is constant B) -MPLF/MPLC; becomes steeper C) -MPLF/MPLC; becomes flatter D) -MPLC/MPLF; becomes steeper E) -MPLC/MPLF; is constant
Explain why the rate of return from investing in stocks is higher than from investing in bonds
What will be an ideal response?
Solar energy has unlimited potential
Indicate whether the statement is true or false
Arguments made against free trade include all of the following except
A) national defense considerations justify producing certain goods domestically whether the country has a comparative advantage in their production or not. B) infant industries should be protected from free trade so that they may have time to develop and compete on an even basis with older, more established foreign industries. C) dumping is an unfair trade practice that puts domestic producers of substitute goods at a disadvantage that they should be protected against. D) free trade is inflationary and should be restricted in the domestic interest. E) if foreign governments subsidize their exports, foreign firms that export are given an unfair advantage that domestic producers should be protected against.