Firm B and firm S are in the process of negotiating a contract whereby S will synthesize a hormone for B. Besides the payment from B to S, three issues are involved: (1) whether the hormone will be 95 percent or only 80 percent pure, (2) whether the target date for completion will be three or five years, and (3) whether B will lend two of its expert biochemists to S to aid in the development. Firm B has estimated its values for various combinations of issues, and firm S has estimated its costs. These amounts are shown in the table:

a 95 percent pure hormone with the loan of the biochemists has a value to B of 180 30 150 and a cost to S of 140 4 100.

a. With three issues (two outcomes each), there are eight possible contracts. Which contracts are inefficient (i.e., produce worse outcomes for both sides than some other contract)?

b. Given that dollar-for-dollar compensation can be paid between die parties, which of the eight contracts is optimal? Explain.