1. (This question was from a take-home midterm) (30 marks) The Holistic Yoga studio and the Morning Coffee Bar are next to each other in the ground floor of a highrise. The coffee bar buys coffee beans and grinds its own coffee; the odour from this process passes through the existing ventilation system into the yoga studio. This disturbs the breathing patterns of many practitioners, several of whom have shifted to another studio. The owner of the yoga studio faces a loss of $3000 a year from these losses. Updating and maintaining the ventilation system to eliminate the odor would cost $1500 per year. If the coffee grinding equipment were moved to the other side of the coffee bar, at a cost of $1000/year, the current ventilation system would be sufficient. a) (5 marks) What is the efficient solution to this problem? How do you know this? Suppose the owners of the two businesses could not cooperate on a solution to this problem. The game matrix below shows the losses to each of the owners for each combination of actions. a) (5 marks) What is the efficient solution to this problem? How do you know this? Suppose the owners of the two businesses could not cooperate on a solution to this problem. The game matrix below shows the losses to each of the owners for each combination of actions. Morning Coffee Bar Move grinders Do nothing Holistic Yoga Studio Update -1500, - 1000 ventilationDo -3000, 0 nothing b) (2 marks) Complete the matrix. c) (5 marks) Is this a prisoner's dilemma game? Briefly explain why or why not. d) (3 marks) What will be the outcome of this non-cooperative game? Suppose now that the studio owner has property rights to clean air. e) (5 marks) What would be the outcome if the owner of the coffee bar was required to fully compensate the owner of the yoga studio for their losses if the air in the studio did not improve and the costs involved in bargaining were very high. Why? f) (5 marks) Would the outcome change if the transactions costs were close to zero? Briefly explain why or why not. g) (5 marks) Would you expect the transactions costs to be high or low in this situation? Briefly explain your