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)=Xa.S, Wwhere xA is the amount of money Person A owns. Person B's utility function is ug(xB, 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 B has the legal right to a smoke-free room and there exists a market for "emission" rights. At the Walrasian equilibrium, what amount of money will person A be left with?
a. Xa=3.5
b. xa=1.5
c.none of the other answers
d.Xa=0
eXa=2.5
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