Consider the following parable. There are five individuals. They can form into groups of different sizes. A group of size 1 gets a total income of $100; of size 2, $250; of size 3, $600; of size 4, $750; and of size 5, $900.

(a) Which collection of groupings maximizes “world income” in this world of five people?

(b) If all group income must be divided equally among group members, which grouping would you expect to arise under spontaneous group formation?

(c) Explain why the answers to (a) and (b) are different. Can you tell an alternative story that attains world income maximization if people are allowed to propose unequal divisions of group income? What additional assumptions on group formation would be required for this alternative story to work?

(d) Can you use this parable to throw light on regional groupings in international trade?