Peter studies at the coffee shop around the corner, at the same time that John talks loudly on his cell phone. The costs and benefits of each cell phone call made by John are given by the following table:

$\begin{array}{|l|r|r|}
\text { \# of cell phone calls}&\text { Marginal
Costs to Peter} &\text { Marginal
Benefits to
John}\
\hline 0 & \$ 0 & \$ 0 \
\hline 1 & \$ 2 & \$ 10 \
\hline 2 & \$ 6 & \$ 8 \
\hline 3 & \$ 10 & \$ 6 \
\hline
\end{array}$ If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if he (John) had the rights to make any calls he liked at the coffee shop?
A)2
B)0
C)1
D)3

Question

Peter studies at the coffee shop around the corner, at the same time that John talks loudly on his cell phone. The costs and benefits of each cell phone call made by John are given by the following table:

$\begin{array}{|l|r|r|}
\text { \# of cell phone calls}&\text { Marginal
Costs to Peter}  &\text { Marginal
Benefits to
John}\
\hline 0 & \$ 0 & \$ 0 \
\hline 1 & \$ 2 & \$ 10 \
\hline 2 & \$ 6 & \$ 8 \
\hline 3 & \$ 10 & \$ 6 \
\hline
\end{array}$ If the both Peter and John could negotiate a settlement without transactions costs, how many phone calls would John end up making if he (John) had the rights to make any calls he liked at the coffee shop?
A)2
B)0
C)1
D)3

Quizplus · Accepted Answer

For each additional call, John's marginal benefit decreases while Peter's marginal cost increases. 
At one call, John's marginal benefit of \$10 is greater than Peter's marginal cost of \$2, so it is beneficial for John to make one call. 
At two calls, John's marginal benefit decreases to \$8 while Peter's marginal cost increases to \$6, meaning it is still beneficial for John to make a second call. 
At three calls, John's marginal benefit decreases again to \$6 while Peter's marginal cost increases even more to \$10, so it is not beneficial for John to make a third call. 
Therefore, John would end up making two phone calls if he had the rights to make any calls he liked at the coffee shop.

Peter Studies at the Coffee Shop Around the Corner, at the Same