Question

Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months. If they live alone, they each rent a one bedroom, one bath apartment for $500 per month, while if they are roommates, they can split a two-bedroom, one bath apartment for $800 per month. The one difficulty they have is that Moe snores very loudly. Curly estimates the cost of poor sleep due to Moe's snoring at $30 per month. Moe could obtain a snore-eliminating device for $50 per month. What will be the efficient solution to this externality problem? How much would each of them be paying in rent per month? Explain carefully.

Answer 1

The most efficient way of this problem would be staying together because it will lead to less cost and this can be analyzed from below:

Cost of living alone for Moe and Curl would be $500 per month.

However, the cost of staying together is calculated as follows:

Cost for Curl would be;

Rent charges + Snore eliminating device

= $400 i e. ($800/2) + $50

=$450 per month

Cost benefit derived = $500 - $450 =$50 per month

Cost for Moe would be:

Rent charges + cost of sleep sacrificed

=$400 i.e. ( $800/2) +$30

=$430

Cost benefit derived= $500 - $430= $70 per month

Thus, Moe and Curl would be better off living together.