Ron owns a Jeep that he values at $2,000. Andy has $15,000 and values the Jeep at $8,000. Suppose Ron and Andy bargain over the sale of the Jeep.
a. If the Jeep is transferred from Ron to Andy, how much cooperative surplus is generated?
b. What is each party's threat value?
c. What is the range of possible prices that might arise from this bargain?
d. If a reasonable outcome occurs (where the cooperative surplus is split evenly), what price is the Jeep sold at and what is each party's payoff after the trade?
e. Suppose Ron is much better at bargaining than Andy is, and captures the entire cooperative surplus. What is the price of the Jeep, and what is each party's payoff after the trade?
f. Now suppose Andy is the better bargainer, and he captures the entire cooperative surplus. What is the price of the Jeep, and what is each party's payoff after the trade?
g. From society's point of view, which of the three outcomes above is the best?