The famous singer
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The famous singer Jason Lumberpond likes to drive his solid-gold rocket car back and
forth in front of his house. The loud noise from the rocket engines imposes a loss equal
to $L on his neighbors. There are two possible ways to avoid that loss. Jason can install
an expensive muffler, or the neighbors can install soundproofing on their houses. The
muffler costs $C and the soundproofing costs $E.
Suppose that E > L > C. Suppose that Jason has a property right over installing the
muffler. That is, Jason chooses whether or not to install the muffler and does not have to
compensate the neighbors for the consequences of his choice. Suppose that the
neighbors have bargaining problems: in particular, they cannot agree that getting rid of
the noise from the rocket car would be worth paying more than $C/2. What outcome do
we expect?
O The neighbors pay Jason an amount between L and E to install the muffler, the neighbors do not
install soundproofing.
O The neighbors pay Jason an amount between C and L to install the muffler, the neighbors do not
install soundproofing.
O Jason does not install the muffler, the neighbors install soundproofing, no payment is made.
O The neighbors pay Jason an amount between C/2 and C to install the muffler, the neighbors do
not install soundproofing.
Jason does not install the muffler, the neighbors do not install soundproofing, no payment is
made.
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