Suppose There Are Ten People Playing Cards in a Room

question 2

Multiple Choice

Suppose there are ten people playing cards in a room. One of them wants to smoke a cigar, nine of them dislike the smell of cigar smoke. The smoker values the privilege of smoking at $5, and each of the other nine people of the room would be willing to pay fifty cents for clean air in the room. The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking. If all ten people can negotiate with each other at no cost, then the Coase theorem predicts that if the cigar smoker has the right to determine whether smoking is allowed, then there ________ be smoking, and if the other nine people in the room have the right to determine whether smoking is allowed, then there ________ be smoking.

• A)will; will
• B)will; will not
• C)will not; will not
• D)will not; will

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Definitions:

Conversion

The act of changing one form of securities into another, such as converting bonds into shares of stock, or the process of changing one currency into another.

Trading Securities

Financial securities that are purchased and held primarily for sale in the near term to generate income on short-term price differences.

Unrealized Holding

A profit or loss that arises from the change in value of an investment that has not yet been sold or realized.