1. Three students are taking the course. There is no rivalry in the consumption of professor’s time and attention during the office hours. However, the students value these hours differently and as follows:

MBa = 10 – (1/3)H, MBb = 12 – (1/3)H, MBc = 14 – (1/3)H

Assume that the marginal cost of Hong’s time per hour is constant and equal to 24 per hour. How many office hours should Hong hold per week, if Hong wants to offer the Pareto efficient number of office hours?

4.  Suppose the economic benefit to a company owner by running his factory is 60, while shutting down the factory will earn him 0. A nearby dentist is negatively

affected by the noise from the factory. Suppose the dentist’s benefit without the noise is 70, while with the noise, it is reduced to 30. Answer the following questions.

• Based on Coasian approach, what will happen if the company owner is liable for the noise damage? What if the company is not liable for the noise? Analyze You may use a table to show your result.

• Suppose the dentist can completely remove the noise by installing soundproofing wall in front of his building, which will cost In addition, transactions cost of 25 will emerge when the two parties try to negotiate. Try to answer 1) with the alternative property right regimes.

5.  A and B live on adjacent plots of land. Each has two potential uses for her land, the present values of each of which depend on the use adopted by the other, as summarized in the table. All the values in the table are known to both parties. [payoffs: (A, B)]

• If there are no negotiation costs, what activities will the two pursue on their land?
• If there are negotiation costs of 150, what activities will the two pursue on their land?
• What is the maximum net income A can earn in parts 1) and 2) above?

6.  The following is a transboundary pollution problem from country A to country B. MDC(A) and MDC(B) are given as follows:

MDC(A) = 5w, MDC(B) = 3w. Also, MAC(A) = 36-w.

Answer the following questions.

• Find the local optimum from country A’s perspective, and the global optimum considering both country A and

• Is there a possibility that country B can financially compensate country A so that the global optimum is attained? Explain What is the maximum allowable transactions cost for this negotiation is be successful?