Puzzles The Arbitrage Mirage, Wait Watchers, and More.pdfVIP

JournalofEconomic Perspectives-Volume3, Number 3-Summer 1989s 165-174 Puzzles The Arbitrage Mirage, Wait Watchers, and More Barry Nalebuff This feature begins with three puzzles motivated by the paradox of the greener envelope, which was described in detail in the Winter 1989 issue. The variants are much simpler and at least one has the flavor of a barroom trick. (I take no responsibility if you are caught.) Answers can be found at the end of the problems. Following these exchange paradoxes are two longer puzzles, also with answers provided at the end. The longer puzzles focus on externality problems: how to design social conventions and toll systems to minimize inefficientwaiting in line. The column ends with reader mail, including comments on the welfare optimality of the competi- tive equilibrium, the pricing policy of the Ocean Club restaurant, Pareto improve- ments for the U.S. economy, and hints for scoring squash. Our first T-shirt awards-which are given for the best new puzzles and most innovative answers- go to Morton Davis, Andy Postlewaite, Richard Zeckhauserand Joe Farrell. Well done. For the rest of you, please send your answers, comments, favorite puzzles andT-shirtsize to me directly: Barry Nalebuff, Puzzles,Yale School of Organization and Management, Box 1A, New Haven, CT 06520. Puzzle 1: The Arbitrage Mirage Morton Davis (The City College of New York) offers the following way to hedge ones bet. Suppose (for simplicity) it is known that in six months the franc (which is worth exactly one pound today) will either be worth two pounds, or half a pound, and * is and Barry Economics Yale Nalebuff Professor New