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Use the following information to answer the questions:

Suppose Bob and Harriet work together in the same office.Bob smokes and Harriet hates smoke.If Bob could do what he pleases, he will smoke 20 cigarettes per day.Harriet's marginal damages (from discomfort in breathing foul air) is given by MD=5+5Q, where Q is the number of cigarettes smoked in the office per day.Bob is an addicted smoker and would incur marginal abatement costs (from withdrawal pains) if he were to cut back on the number of cigarettes he smoked per day, given by the equation MAC=40-2Q.

7.What would be the net benefits to the two-worker community if Bob were to reduce the number of cigarettes he smoked per day to the efficient level? $ _______________

8.What would be the net benefits to the two-worker community if smoking was no longer allowed in the office? $ _________________

Suppose that Bob, having seniority in the company, initially has the right to smoke as many

cigarettes as he likes.

9.If there are no transactions costs associated with bargaining between Bob and Harriet, what

does the Coase Theorem predict will be the number of cigarettes smoked in the office after

bargaining? _________

10. If Harriet's bargaining were to just compensate Bob for his withdrawal pains, what

will Harriet's net benefit be from the bargain? $ __________________

Now, suppose Harriet gets a promotion so that she then has seniority in the company and

therefore the right to breathe clean air (to have no smoking) in the office.

11. If there are no transactions costs associated with bargaining between Harriet and Bob, what

does the Coase Theorem predict will be the number of cigarettes smoked in the office after

bargaining? _____________

12. If Bob's bargaining were to just compensate Harriet for her discomfort in breathing foul air,

what will Bob's net benefit be from the bargain? $ ________________