Same as Problem 16, except now payoff values of each person are

a. If Smith and Jones are payoff maximizers and make their decisions individually, what will they do?

b. If Smith and Jones can make binding agreements with each other, what will they do?

c. How do your answers differ from Problem 16 and why?

16.1. With a negotiation cost of only 20, it is now practical for the confectioner to pay the doctor to rearrange his office when the confectioner is liable. But note in the table below that it is still more efficient for the confectioner not to be liable:
Net Benefit Legal regime Outcome Doctor Confectioner Total Liable Confectioner operates 22  P 40 P 62 and pays doctor 18 P 20 to rearrange office Not liable Doctor rearranges his 22 60 82 office at his own expense Net Rental Payment ($/mo) Net Gain ($/mo)
Jones Smith Jones Smith Total Live separately 300 300 — — —
Live together 210  X 270 X 90 X 30  X 120 and install exhaust system for smoke, 30 X 90 16.2. Recall that the optimal number of steers is two. The grazing fee must be more than 2 to prevent a third steer from being sent out to graze. The fee cannot be more than 6 without keeping the second steer from being sent out.
16.3. Now the cost of accommodating to the smoke problem is 60, which is again less than the joint savings in rent. Let X represent Jones’s contribution to the cost of the exhaust system, which means that Smith’s contribution is 60 X. X cannot exceed 90, or else Jones will live separately; and X cannot be less than 30, or else Smith will live separately. The total gain is 180 60  120.