Suppose That Charles Wants to Dine at a Fancy Restaurant

question 65

Multiple Choice

Suppose that Charles wants to dine at a fancy restaurant, but the only available table is in the smoking section. Charles dislikes the smell of cigarette smoke. He notices that only one person, Sam, is smoking in the smoking section. Charles values the absence of smoke at $40. Sam values the ability to smoke in the restaurant at $15. Which of the following represents an efficient solution in the absence of transaction costs?

• A)Sam continues to smoke because he has a right to smoke in the smoking section.
• B)Charles offers Sam between $15 and $40 not to smoke. Sam accepts, and both parties are better off.
• C)Charles offers Sam between $15 and $40 not to smoke. Sam declines because he has a right to smoke in the smoking section.
• D)Only a government policy banning smoking in restaurants will solve this problem.

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Definitions:

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period of time, resulting in a net profit or loss.

Capital Account

An account on the balance sheet representing the original investment by the owners plus any retained earnings.

Owner Invests

The action taken by an owner to contribute resources, such as cash or other assets, into the business for its use.

Revenue

The aggregate revenue derived from selling goods or services that are fundamental to an organization's main activities.