Two roommates, Rick and May. Rick smokes. Each has an income I If S consumes q cigarettes, utility functions are uR(q, money) = 4√q + money uM(q, money) = −0.5q + money Note that q aects the utility of May in a negative way Let p be the price per cigarette, then money = I − pq and uR(q) = 4√q + I − pq for Rick.

Rick and May could negotiate an agreement (contract) where: May compensates Rick for not smoking. For instance, she pays Rick $0.5 for him to smoke only 2 cigarettes. Both are weakly better o, and they accept or Rick compensates May for being allowed to smoke. For instance, he pays May $1 for him to smoke 2 cigarettes. Both are weakly better o, they accept ⇒ outcome will be q = q ∗ = 2 (efficient)

can anyone explain why Rick pays 0.5$ to May for smoking 2 cigarettes, and what May pay 1$ for Rick??