Firm B and firm S are in the process of negotiating a contract whereby S will synthesize a hormone for B. Besides the payment from B to S, three issues are involved:
(1) Whether the hormone will be 95 percent or only 80 percent pure,
(2) Whether the target date for completion will be three or five years, and
(3) Whether B will lend two of its expert biochemists to S to aid in the development.
Firm B has estimated its values for various combinations of issues, and firm S has estimated its costs. These amounts are shown in the table.

Lending the biochemists is purely an additive factor; doing so reduces B€™s value but also reduces S€™s cost. For example, a three-year contract for a 95 percent pure hormone with the loan of the biochemists has a value to B of 180 - 30 = 150 and a cost to S of 140 - 40 = 100.
a. With three issues (two outcomes each), there are eight possible contracts. Which contracts are inefficient (i.e., produce worse outcomes for both sides than some other contract)?
b. Given that dollar-for-dollar compensation can be paid between the parties, which of the eight contracts is optimal?Explain.

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B's Values 3 Years 5 Years S's Costs 95% 80% 180 160 100 60 Years 140 90 5 Years 80 50 No biochemists Biochemists 0 30 0 20 30 40