2. (3%) Bess says that she always (weakly) prefers a consumption bundle with more movies or more pizza (or both).

In fact, $500 is Emma’s expected benefit from the dress. With probability 1/2, Emma would like the dress very much, and obtain a benefit $800; and with probability 1/2, Francesca’s design doesn’t really impress Emma, whose benefit from the dress is only $200. The true benefit of the dress is Emma’s private information, and does not affect the transaction price. Suppose that Emma and Francesca first sign a contract and agree to trade at a price $p \geq 300$ (not necessarily the fair price). Then, Emma learns the true benefit of the dress ($800 or 200). Finally, if they trade, Francesca spends the cost to make the dress, and Emma pays the price $p and gets the dress. Both Emma and Francesca are risk neutral. An efficient trading rule maximizes social surplus (the sum of consumer surplus and producer profit). Here, it requires Francesca make, and Emma get the dress if and only if the cost is smaller than the benefit. 2. (3%) What is the expected social surplus under the efficient trading rule?

2. (3%) Bess says that she always (weakly) prefers a consumption bundle with more movies or more pizza (or both).

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