3. Imagine that you are a nonsmoker sharing a room with a smoker. According to the Coase theorem, what determines whether your roommate smokes in the room? Is this outcome efficient? How do you and your roommate reach this solution?

See the explanation below.

Explanation:

Coase theorem states that it is possible for private parties to solve the problems of externalities with involving a third party it is costless for them to bargain over resource allocation.

Given this description, we can now answer the question as follows:

a.  What determines whether your roommate smokes in the room?

Based on the above, the smoker and non-smoker will bargain over whether it is possible for the smoker to continue smoking in the room based on the value of the choice of each party.

If the value placed on clean air by the nonsomker is greater than the value the smoker placed on smoking, the bargain will result in stopping smoking by the smoker. But if the value placed on smoking by the smoker is greater than the value the nonsmoker placed on clean air, the bargain will result in the smoker continue to smoke in the room.

b. Is this outcome efficient?

This outcome is efficient as the bargaining process is costless or as long as no transaction costs prohibit them from reaching an agreement.

c. How do you and your roommate reach this solution?

It is possible to reach this solution either by the non-smoker paying off the smoker to stop smoking, or the smoker paying off the non-smoking roommate to continue smoking.

Reason 1. Cost savings due to cheaper products of same quality available from the international market.

Reason 2. Technological advancement

Reason 3. The marginal Cost remains below marginal revenue

Reason 4. Developing competencies in Core Operations.

Explanation:

Reason 1. Cost savings due to cheaper products of same quality available from the international market.

The reason is that the the foreign companies might have cheaper labor, better infrastructure or business facilities which helps them to manufacture cheaper products in the country. So importing them would give the company cost advantage over other rival both domestically and internationally.

Reason 2. Technological advancement

The quality of the product that is ordered from the foreign country is much higher than the quality products of the home industry. Importing such technologically advance product will gove the company upperhand over the rivals, so it might be one of the reasons.

Reason 3. The marginal Cost remains below marginal revenue.

In this case, the company if exceeds certain level of production then the costs becomes uncontrolable but if it uses the production capacity of the foreign company then it can make additional profit by using that product to fulfill marginally small production order which is above its production capacity. Though it is rare but it happens in practical life.

Reason 4. Developing competencies in Core Operations.

If the company outsources its most of unimportant operations, then it can focus on the core operations of the company which would help them in creating competitive advantage and help grow the market share. Furthermore, outsourcing is very common nowadays because due to technological advancements, the country can make use of foreign country labors which costs the company much lower than the labor in the home country.