|In a dormitory two students are are sharing one room. Student A likes to read French lyric. |
Student E loves the Rolling Stones. The students have the following utility functions:
mA = (xA )1/2+ (M - m )1/2
UE = (xE)1/2 + (m)1/2
xi -- consumer spending of the person (A,E) i?
m -- volume of the music (Rolling Stones)
M -- greatest possible volume
Each person has an income of It = 2
1. Why is a prohibition of stereos not efficient?
2. What is a Pareto efficient volume?
3. If student E owns a tradable permit for playing music, what would the according market equilibrium look like?