Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is UA(XA,S)=XA.S, where XA is the amount of money Person A owns. Person B's utility function is ug(x8, 1s)=xg.(1-s)³, where xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Person A has the legal right to a fill up the room with smoke and there exists a market for smoke "abatements". If the price of money is 1, what will be the value of the smoke index s at the Walrasian equilibrium?
Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is UA(XA,S)=XA.S, where XA is the amount of money Person A owns. Person B's utility function is ug(x8, 1s)=xg.(1-s)³, where xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Person A has the legal right to a fill up the room with smoke and there exists a market for smoke "abatements". If the price of money is 1, what will be the value of the smoke index s at the Walrasian equilibrium?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the
room is. It varies from s=0, where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus,
1-s measures how "clean" the air in the room is. Person A's utility function is uA(xA,S)=XA.S, where XA is the amount of
money Person A owns. Person B's utility function is ug(Xg, 1s)=xg .(1-s)3, where xg is the amount of money Person B
owns. Each person starts with an endowment of 5 units of money. Person A has the legal right to a fill up the room
with smoke and there exists a market for smoke "abatements". If the price of money is 1, what will be the value of
the smoke index s at the Walrasian equilibrium?
a. s=0.1
O b. s=0.2
O c. s=0.4
O d. s=0.3
O e. None of the other answers.
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