Suppose There Are Ten People Playing Cards in a Room

question 7

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 occupants 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.
Refer to the information given above.Which outcome is consistent with the Coase Theorem?

• A)The cigar smoker will not be able to smoke because there are more non-smokers in the room.
• B)The cigar smoker will pay each other occupant fifty-five cents,and they will agree to allow smoking.
• C)The cigar smoker will smoke because the external cost of smoking does not need to be taken into consideration.
• D)The nine non-smoking occupants will each pay the cigar smoker fifty cents and the cigar smoker will not smoke.

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Definitions:

Land Account

A record in the financial statements that represents the cost of land owned by an entity, not depreciated over time.

Service Potential

Service potential refers to the future benefits or value that assets, especially non-financial ones, will provide to an entity over their useful life.

Accumulated Depreciation

The cumulative depreciation expense recorded for a fixed asset from the time it was initially utilized.

Fair Value

An estimate of the market value of an asset or liability based on current conditions.