microeconomics, Coase Theorem

timer Asked: Dec 11th, 2015

Question description

Apple and bee live on adjacent plot of land. Each has two potential uses for his land, the present values of which depend on the use adopted by the other, as summarized in the tab le below. All the values are known to both parties. Careful, although it looks like a game theory matrix, this is an application of the coase theorem. Bee and apple are allowed to negotiate. 

Apple growingPig farming
BeeRental housing700,200400,450
Bee keeping650,400


1) If negotiations do not cost anything, what activities will the two pursue on their land?

2) If there are negotiation costs of $150, what activities will the two pursue on their land?

3) What is the maximum net income Apple can earn in parts (1) and (2)?

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