Consider two individuals, Musashi and Rina, living in a hypothetical economy. They devote eight hours per day to either producing goods, stealing goods from each other, or some combination of both actions. Suppose each individual faces the same costs and benefits schedule, presented in the following table, from production and stealing.

Number of Hours	Total Costs of Production	Total Benefits from Production	Total Costs of Stealing	Total Benefits from Stealing
1	$10	$120	$10	$10
2	$20	$230	$20	$40
3	$30	$330	$30	$90
4	$40	$410	$40	$160
5	$50	$470	$50	$260
6	$60	$510	$60	$340
7	$70	$530	$70	$390
8	$80	$540	$80	$420

Musashi will spend his first hour goods.

In equilibrium, Rina will spend on production and on stealing per day.

Suppose that each person has 15 units of resources that can be used for production, protection against stealing, or some combination of the two. When no one steals, each individual can devote all one’s resources to production and produce 15 units of goods. When individuals steal, some resources must be devoted to protection against theft. Consequently, fewer than 15 units of goods will be produced by each individual.

Both Musashi and Rina realize that they would be better off if neither steals from the other, and therefore, they agree not to steal from each other. The table shows the payoff matrix for Musashi and Rina in terms of the amounts of goods received if they hold to the agreement (Hold) and the amounts of goods received (produced and stolen from the other) if they break the agreement (Break).

		Rina
		Hold	Break
Musashi	Hold	15 , 15	10 , 18
	Break	18 , 10	12 , 12

What will be the equilibrium action for Musashi and Rina without government intervention?

Musashi will choose to break the agreement while Rina will choose to hold to the agreement.

Both Musashi and Rina will choose to hold to the agreement and not steal from each other.

Each individual will choose an action depending on what the other will choose.

Both Musashi and Rina will choose to break the agreement and steal from the other.

Musashi will choose to hold to the agreement while Rina will choose to break the agreement.

Suppose that the government imposes property rights laws and punishes individuals for stealing. In particular, the government imposes a penalty equivalent to four units of goods on any individual who steals (assume that anyone who steals is always caught).

Fill in the following payoff matrix to show the individuals’ payoffs under new property rights laws.

		Rina
		Hold	Break
Musashi	Hold	,	,
	Break	,	,

In this case, Musashi will choose to the agreement and Rina will choose to the agreement.

Assume that the government levies taxes on both Musashi and Rina of an amount equivalent to five units of goods. Which of the following is true about the combined effects of the property rights law and taxation on Musashi and Rina?

The government makes both Musashi and Rina better off.

The government makes both Musashi and Rina worse off.

The government does not make either Musashi or Rina better off or worse off.

The government makes one person better off and one worse off.