Kate and Ali can live together in a two-bedroom apartment for $600 per month, or they can each rent a one-bedroom apartment for $400 per month. Apart from the rent, they are indifferent between living together and living apart, except for one problem: Kate hates Ali's taste in music. Kate would be willing to pay up to $100 a month to avoid hearing Ali's music. Ali would give up listening to her music for no less than $300 per month. If Kate and Ali decide to live together, is it socially optimal for Ali to play her music in the apartment?
A)Yes, because the benefit to Ali of listening to her music is greater than the cost to Kate.
B)No, because the benefit to Ali of listening to her music is less than the cost to Kate.
C)Yes, because the benefit to Ali of listening to her music is less than the cost to Kate.
D)No, because the benefit to Ali of listening to her music is greater than the cost to Kate.

Question

Quizplus · Accepted Answer

The benefit to Ali of listening to her music is $300 per month (the amount you would have to pay her to give up listening to her music). The cost to Kate of listening to Ali's music is $100 per month (the amount Kate would be willing to pay to avoid hearing Ali's music). Since the benefit to Ali of listening to her music is greater than the cost to Kate of hearing her music, it is socially optimal for Ali to play her music if they live together.

Kate and Ali Can Live Together in a Two-Bedroom Apartment