Author Question: Your friend has just received a new book he ordered and you want to borrow it. Your friend values ... (Read 72 times)

Shelles · **on:** Jun 29, 2018

Your friend has just received a new book he ordered and you want to borrow it. Your friend values reading the book at 10, while you are willing to pay a maximum amount of 15 to read it.

a) What is the equilibrium outcome in this case? b) Will the outcome be any different if you own a book that your friend wants to read? Assume that the value that each of you places on this book is the same as that you placed on the previous book.

Question 2

Refer to the scenario above. Which of the following will happen if the equilibrium price charged by the firm in the short run is 130?

A) The firm will earn positive economic profits and continue production.
B) The firm will incur a loss but continue production.
C) New firms will enter the industry in the long run.
D) All firms will incur losses in the long run.

aliotak · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

a) Because your friend owns the book and values reading it at 10 while you value reading it at 15, an efficient outcome can be reached if you decide to give an amount between 10 and 15 to your friend in exchange for the book. Your friend will be better off as he will get an amount higher than his valuation for the book, and you will be better off as you will have to pay an amount lower than your maximum willingness to pay for the book. Therefore, this equilibrium is efficient. However, the exact amount that you will have to pay will depend on your bargaining power.

b) In this case, an efficient outcome is possible if your friend has a higher value for the book than you. If your friend has a higher valuation for reading the book than you do, he will pay you an amount higher than your valuation for the book and lower than the value he assigns to reading the book.

Answer to Question 2

B