John owns a ranch and Michael owns a farm next to each other. John can have up t
ID: 1196872 • Letter: J
Question
John owns a ranch and Michael owns a farm next to each other. John can have up to eight cows and earns profits of $17 for each cow in the heard. Michael would normally earn profits of $150 if no cows were around, but has those profits reduced by cows which wander into his fields. The reduction in profits depends on the number of cows, according to the following information:
a.) What is the socially optimal number of cows in John’s herd?
b.) John has the property right to have his cows wander onto Michael’s field. Now assume that the two parties can negotiate with each other, and that the transaction costs are zero.
c.) What are the threat values of Michael and John? Do you expect efficiency to be achieved? Explain and present all the calculations.
Herd Size 0 1 2 3 4 5 6 7 8 Michael's Loss $0 $8 $18 $30 $44 $60 $78 $98 $120 Michael's Total Profit $150 $142 $132 $120 $106 $90 $72 $52 $30 John's Total Profit $0 $17 $34 $51 $68 $85 $102 $119 $13Explanation / Answer
a) Socially optimal number of cows in John's herd = 4 where MC=MB
b) If John has the property right to have his cows wander onto Michael's field, Michael will go for negotiation and will offer John upto $16.
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