Question
Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies
Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is ua(XA,S)=X4.S, where xA is the amount of money Person A owns. Person B's utility function is ug(Xg,1s)=Xg .(1-s), where xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Person A has the legal right to a fill up the room with smoke and there exists a market for smoke "abatements". If the price of money is 1, what will be the (per unit of the index s) price p of smoke abatements at the Walrasian equilibrium? a. p=15 b. p=10 c. p=13 d. p=9 e. None of the other answers.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started