Consider Two Children,Janet and Joey,sharing the Same Room

question 118

Essay

Consider two children,Janet and Joey,sharing the same room.Janet loves to play loud music while Joey does not like loud music.Suppose Janet is willing to pay Joey $2 to be allowed to play loud music,and Joey is willing to pay Janet $3 to keep the room quiet.
(A)What would be the socially optimal outcome? Why is it optimal?
(B)How might this outcome be achieved by an agreement between the two children? What theorem does this illustrate?

---

Definitions:

Differentiated Products

Products that are distinguished from others through variations in quality, features, design, branding, or customer service.

Equilibrium Price

The market price at which the quantity of goods supplied is equal to the quantity of goods demanded.

Reaction Curve

A graph that shows how one player's optimal strategy choice depends on the strategy choice of another player.

Bertrand Model

An economic model of competition among firms in which they simultaneously choose prices rather than quantities, with the assumption that consumers choose the firm with the lowest price.