Question

In: Economics

You are a consultant and work from home. You have a roommate, Ann, and you share...

You are a consultant and work from home. You have a roommate, Ann, and you share the total cost of the rent equally, which is $600/fortnight. Alternatively, you may stay separately in a smaller apartment paying $400/fortnight as the rent. During the outbreak of the pandemic, Ann has also started working from home. You noted she attends zoom meeting and constantly talks, that severely hampers your productivity. When you mentioned this to Ann, she indicated to pay up to $250/fortnight for this privilege. You, on your part, would pay up to $150/fortnight to have a better work environment. Should you live together or separately? What is the highest rent you would be willing to pay to share the apartment with Ann? What about Ann? Now say you would additionally be willing to pay up to $60/fortnight to avoid the loss of privacy that comes with the shared living space. Should you two live together?

Solutions

Expert Solution

Moving to a smaller apartment will cost us $100 extra (as we are paying 600/2=300 right now), but will give us a peacful environment to work. We value a better work environment at $150. So, total benefit of moving to a new apartment is $150-$100=$50.

Ann is ready to pay $250, on her part, to compensate for the ruckus. If we take that deal, the benefit we get from staying here is

250-150=$100.

Since the benefit is higher when staying with Ann, we should stay together as of now.

The highest rent that we would be willing to pay is the one which gives us same net benefit at both houses. Since living with Ann, as of now, gives us an extra benefit of 50 (100-50, as shown above), we would be willing to pay maximum 50 more in rent. So, the max rent we would be willing to pay is

300+50=$350.

If Ann moves out, she has to pay 100 extra but doesnt have to pay 250 to us. Her net benefit is

250-100=150.

So, she should move out, or pay a maximum rent of 300-150=150.

What the last part means is that we will have an additional $60 benefit in moving out. So, now net benefit in moving out becomes 50+60=110. Since this is higher than the benefit of staying with Ann (which is 100), we should move out in this new case.

Rahul Sunny answered 2 years ago
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