Question

Sophia sits behind Gabriel on an airplane. Gabriel owns the right to recline his seat and values this right at $10. Sophia values a non-reclined seat in front of her at $40. Assuming no transaction costs, which of the following represents an efficient solution?a. Sophia offers Gabriel between $10 and $40 to not recline his seat. Gabriel accepts, and both parties are better off.b. Sophia offers Gabriel between $0 and $10 to not recline his seat. Gabriel accepts, and Sophia is better off.c. Sophia offers Gabriel between $10 and $40 to not recline his seat. Gabriel declines because he has the right to recline his seat.d. Gabriel offers Sophia between $10 and $40 to recline his seat. Sophia accepts, and both parties are better off.

Answer 1

a. Sophia offers Gabriel between $10 and $40 to not recline his seat. Gabriel accepts, and both parties are better off.

Explanation:

We will see each option and we will be able to deduce which is the best, we have the following options:

a. Sophia offers Gabriel between $10 and $40 to not recline his seat. Gabriel accepts, and both parties are better off.

It makes sense, since Sophia would be paying Gabriel the corresponding value, therefore, in both cases they win.

b. Sophia offers Gabriel between $0 and $10 to not recline his seat. Gabriel accepts, and Sophia is better off.

This Gabriel loses by a lot since the value of Sophia is between $10 and $40, she offers him much less, very in favor of Sophia.

c. Sophia offers Gabriel between $10 and $40 to not recline his seat. Gabriel declines because he has the right to recline his seat.

Although Gabriel is in the right to decline, it would be the case where Sophia would lose, since he will have to pay the full value of the seat.

d. Gabriel offers Sophia between $10 and $40 to recline his seat. Sophia accepts, and both parties are better off.

In this case, both parties cannot be better, because in reality the value of Gabriel's position is $10, therefore he would lose.

Therefore, the most viable option is a.