Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. $$\begin{array} { | l | c | c | }
\hline & \begin{array} { c }
\text { Quick Burger } \
\text { Operates a } \
\text { Drive-Through } \
\text { Window }
\end{array} & \begin{array} { c }
\text { Quick Burger } \
\text { Does Not Operate } \
\text { Drive-Through } \
\text { Window }
\end{array} \
\hline \text { Quick Burger } & \$ 24,000 & \$ 15,000 \
\hline \text { The Sunshine Café } & \$ 11,000 & \$ 23,000 \
\hline
\end{array}$$ Suppose Quick Burger has the legal right to operate a drive-through window, and Quick Burger and the Sunshine Café can negotiate with each other at no cost. Which of the following arrangements would lead to the socially optimal outcome?
A)Quick Burger pays The Sunshine Café $12,500 per month to operate the drive-through window.
B)Quick Burger pays The Sunshine Café $10,500 per month to operate the drive-through window.
C)The Sunshine Café pays Quick Burger $12,500 per month not to operate the drive-through window.
D)The Sunshine Café pays Quick Burger $10,500 per month not to operate the drive-though window.

Question

Consider two restaurants located next door to each other: Quick Burger and The Sunshine Café. If Quick Burger opens a drive-through window, the increased traffic and noise will bother customers seated outside at The Sunshine Café. The table below shows the monthly payoffs to Quick Burger and The Sunshine Café when Quick Burger does and does not operate a drive-through window. $$\begin{array} { | l | c | c | } 
\hline & \begin{array} { c } 
\text { Quick Burger } \
\text { Operates a } \
\text { Drive-Through } \
\text { Window }
\end{array} & \begin{array} { c } 
\text { Quick Burger } \
\text { Does Not Operate } \
\text { Drive-Through } \
\text { Window }
\end{array} \
\hline \text { Quick Burger } & \$ 24,000 & \$ 15,000 \
\hline \text { The Sunshine Café } & \$ 11,000 & \$ 23,000 \
\hline
\end{array}$$ Suppose Quick Burger has the legal right to operate a drive-through window, and Quick Burger and the Sunshine Café can negotiate with each other at no cost. Which of the following arrangements would lead to the socially optimal outcome?
A)Quick Burger pays The Sunshine Café $12,500 per month to operate the drive-through window.
B)Quick Burger pays The Sunshine Café $10,500 per month to operate the drive-through window.
C)The Sunshine Café pays Quick Burger $12,500 per month not to operate the drive-through window.
D)The Sunshine Café pays Quick Burger $10,500 per month not to operate the drive-though window.

Quizplus · Accepted Answer

The socially optimal outcome occurs when the total payoffs to both restaurants are maximized. In this case, the socially optimal outcome occurs when Quick Burger does not operate a drive-through window, and both restaurants earn their highest payoffs (\$15,000 for Quick Burger and \$23,000 for The Sunshine Café). 
Option D is the correct answer since The Sunshine Café pays \$10,500 per month to Quick Burger so that Quick Burger does not operate a drive-through window. By taking this deal, Quick Burger will earn less money (\$15,000 < \$24,000), while The Sunshine Café will earn more money (\$23,000 > \$11,000). Therefore, both restaurants will get their highest payoffs as Quick Burger is not operating the drive-through, and therefore, this arrangement is socially optimal.

Consider Two Restaurants Located Next Door to Each Other: Quick