ECON 471 Lecture : Econ371_practice_sols_q3.pdf
Document Summary
Since option (iii) is the confectioner"s lowest cost option, the confectioner would install the sound-proo ng device. In this case there is no reason for the doctor and confectioner to bargain. This is the e cient outcome. (b) the doctor will bargain with confectioner and o er to pay him to eliminate the noise. The largest payment the doctor would be willing to o er would be , which is the value to the doctor of a noise-free environment. The smallest payment acceptable to the confectioner would be , which is the cost of the sound-proo ng device. So in this case it is likely that the doctor would pay the confectioner , where p , and the confectioner would install the sound proo ng device. Again, this is the e cient outcome. (c) the outcome would be the same as in part (a): the confectioner would install the sound proo ng device and no bargaining would take place.
