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 from s=0, where
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+ln(1+s), where xAis the amount of money Person A owns.Person B's utility function is uB(xB,1s)=3xB+2(1-s), where xBis 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 is a market for "emission right." At the Walrasian equilibrium, what will be the (per unit of smoke index) price p of the emission rights if the price of money is 1?
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