Suppose Homer is willing to pay $500 for a sofa, and Marge is willing to pay $300 for the same sofa. Both of them value not having a sofa at $0, and they can't share (Homer is large).

(a)Is it fair to say Homer values the sofa more than Marge?Why or why not?Explain.

(b) Is it efficient for Homer to get the sofa, and Marge not? What about the opposite arrangement? Explain.

(c) Now, suppose Homer and Marge both could exchange money (which they value), along with the sofa. Repeat (b) under this assumption. (Hint: What are the outcomes in this situation?)

(d) Can you see why, in a standard supply and demand model, we often just consider the willingness to pay?How does it relate to your answer to (c), above?