Before Do nothing SD wall .Pacifica wall Both wall SD floor & wall SD floor & wall+Pac wall SD sells out
Pacifica cost 30000 30000 30000
Pacifica profit 300000 50000 150000 120000 170000 250000 270000 250000
SD cost 30000 30000 70000 70000
SD profit 200000 170000 200000 170000 130000 130000 80000
total profits 300000 250000 320000 320000 340000 380000 400000 330000

Max SD profits are $200,000, which occur under two scenarios: doing nothing, and with Pacifica installing its own insulation. Max Pacifica profits are $270,000 if Pacifica installs wall insulation and SD installs both floor and wall insulation. The most efficient allocation of resources (defined as maximizing joint profits) is joint profits of $400,000, which occurs if Pacifica installs wall insulation and SD installs both floor and wall insulation. This assumes that the $270,000 figure for Pacifica profits is net of the $30,000 cost of Pacifica wall insulation.

First, letís make sure we agree on the economic results of the different scenarios.

The best approach for Pacifica is to pay $30,000 to install its own wall insulation and pay $70,000 to SD to install wall and floor insulation which would result in Pacifica profits of $200,000.

SD may bargain for more than its costs, in which case Pacifica should be willing to pay up to $150,000, which would leave it as well off as the best that it can achieve without SD doing anything (Pacifica installs wall insulation, SD does nothing, and Pacifica has profits of $120,000)