Suppose That Bill Wants to Dine at a Fancy Restaurant

question 166

Multiple Choice

Suppose that Bill wants to dine at a fancy restaurant, but the only available table is in the smoking section. Bill dislikes the smell of cigarette smoke. He notices that only one person, Peter, is smoking in the smoking section. Bill values the absence of smoke at $15. Peter values the ability to smoke in the restaurant at $10. In order for Bill to pay Peter not to smoke, he will need to tip the waiter $10 to facilitate the transaction. Which of the following represents an efficient solution?

• A)Peter continues to smoke because the cost to Bill to pay him not to smoke is between $20 and $25, which exceeds the benefit to him of no smoking ($15).
• B)Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off.
• C)Bill offers Peter between $10 and $15 not to smoke, and he pays the waiter $10. Peter declines because he has a right to smoke in the smoking section.
• D)Bill offers Peter $5 not to smoke, and he pays the waiter $10. Peter accepts, and both parties are better off.

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Definitions:

Capital Lease

A contractual arrangement that transfers substantially all the benefits and risks of ownership to the lessee so that the lease is in effect a purchase of the property.

Plant Assets

Long-term tangible assets used in the operation of a business, such as buildings, machinery, and equipment.

Loss On Redemption

A financial loss experienced when redeeming bonds or securities before their maturity date for a price higher than their face value.

Carrying Value

The book value of an asset or liability on a company's balance sheet, calculated as its original cost minus any depreciation, amortization, or impairment costs.