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:

World Equilibrium Price

The price level at which the supply and demand of a good on a global scale are balanced, leading to a stable international market price.

Diagram

A simplified drawing showing the appearance, structure, or workings of something, typically presented as a plan, chart, or graph.

Price Level

A measure of the average prices of goods and services in an economy at a specific time, often used to assess inflation.

Equilibrium World Price

The price at which the global supply of a good matches the global demand for that good.