Eric and David are roommates. Eric is a personal fitness trainer while David is a professor. Eric likes to wake up early because this allows him to schedule clients as early as 4 am while David often works late at night on research and hence does not like to be bothered in the morning. Eric is quite loud in the morning and will wake up David almost every day. David does not do well at work when he does not have a good night's sleep. The table below shows the payoffs.

 

1. What is the efficient solution?
   1. 6 AM
2. What are the payoffs in the efficient solution?
   1. Eric = $5,000; David = $12,000
3. Suppose Eric has property rights. In the case of no negotiations, what time will Eric most likely wake up?
   1. 4 AM
4. Assume Eric has property rights and there are no negotiations, what are the payoffs?
   1. Eric = $10,000; David = $5,000
5. Assume Eric holds property rights, what is the total amount of the surplus from the cooperative agreement?
   1. $2000
6. Assume Eric holds property rights, describe what happens in a reasonable solution?
   1. David pays Eric $6,000 to wake up at 6 AM
7. Assume Eric holds property rights, What are payoffs in reasonable solution?
   1. Eric = $11,000; David = $6,000
8. Now assume David has property rights and there is an injunction in place requiring Eric to no wake up before 7AM. What are the threat value payoffs without negotiation?
   1. Eric = $1,000; David = $13,000
9. Now assume David has property rights and there is an injunction in place requiring Eric to no wake up before 7 AM. What is the surplus from cooperative negotiation?
   1. $3,000
10. Now assume David has property rights and there is an injunction in place requiring Eric to no wake up before 7 AM. Describe what happens in a reasonable solution?
    1. Eric pays David $2,500 to wake up at 6 AM
11. Now assume David has property rights and there is an injunction in place requiring Eric to no wake up before 7 AM. What are the payoffs in the reasonable solution?
    1. Eric = $2,500; David = $14,500
12. Now assume David has property rights and the remedy is damages. If Eric wants to wake up earlier than 7 AM, he will have to pay David damages (lost profits). What are the threat value payoffs without negotiations?
    1. Eric = $4,000; David = $13,000
13. Now assume David has property rights and the remedy is damages. If Eric wants to wake up earlier than 7 AM, he will have to pay David damages (lost profits). What is the surplus from cooperative negotiation?
    1. $0
14. Now assume David has property rights and the remedy is damages. If Eric wants to wake up earlier than 7 AM, he will have to pay David damages (lost profits). Describe what happens in reasonable solution?
    1. Nothing else, Eric pays David the total amount of damages
15. Now assume David has property rights and the remedy damages. If Eric wants to wake up earlier than 7 AM, he will have to pay David damages (lost profits). What are payoffs in reasonable solution?
    1. Eric = $4,000; David = $13,000
16. Now assume David has property rights and the remedy damages. If Eric wants to wake up earlier than 7 AM, he will have to pay David damages (lost profits). What time will Eric most likely wake up?
    1. 4 AM
17. Now assume David has property rights and the remedy damages. If Eric wants to wake up earlier than 7 AM, he will have to pay David damages (lost profits).
    1. Eric = $6,000; David = $9,000

Eric's Wake up Time 4 am 5 am 6 am 7 am Eric $10,000 $7,500 $5,000 $1,000 MDavid $5,000 $9,000 $12,000 $13,000