Olivia and Francesca are sisters. They live together and are considering purchasing a new car. The car payments would cost $300 a month. Francesca is willing to pay $190 and Olivia is willing to pay $170. Both decide independently whether or not to contribute toward car payments. If they both choose to contribute, they split the cost. But if Olivia contributes and Francesca does not, Olivia must pay the full cost of the car loan (and vice versa). If neither contributes, no one pays and the car is not purchased.

a)(2 points) Is it socially efficient to purchase the car? Why?

b)(8 points) Draw the payoff matrix (write Olivia's payoff as the first number in each box and Francesca's payoff as the second).

Francesca

Olivia

Contribute

Don't contribute

Contribute

Don't contribute

c)(4 points) Given your answers to part B, what will each sister decide to do - contribute or not contribute?

Olivia: ____________________

Francesca:_________________