Question

1. Robin enjoys poetry, up to a point; Friday is no fan of poetry at all. They live together and every night, they read poetry together. Robin's utility function is u(p, t) = 64p-p-t, where p is Robin's poetry consumption (minutes per night, p?o); Friday's utility is v(p, t)=t-3p², where p is Friday's poetry consumption (minutes per night). Remember, they always read poetry together. Lett represent a payment ($/minute) from Robin to Friday, so that negative values fort represent payments from Friday to Robin. a. (3 points) What is the socially efficient amount of poetry? Please explain. b. (5 points) Assume that transaction costs are zero. If Robin has the right to read as much poetry as she desires, what will happen? Please be precise. c. (4 points) Assume that Friday has the property right to the choice of p. What is the largest that transaction costs can be such that Robin and Friday still will enter into an agreement? Please explain carefully.

Answer 1

a.) Here in this case of poetry as the social efficiency is a kind of

> Optimal distribution of the resource in to the society.

> Both internal as well as external cost will be taken into an account as a benefit.

> It occurs as an output where the Marginal Social Benefit (MSB) = Marginal Social Cost (MSC) in the case of poetry.

b.) The transaction cost = 0

And the robin has the right to read as much as the poetry as she desire . they both read the poetry together due to which the transaction can be increase but here it is given that the transaction is = 0 so the payment can also be increase due to social efficiency occurs as an output and by this the value of u(p,t) and v(p,t) both get increase.