5 Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0,where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A'sutility function is ua(XA,S)=X4+In(1+s), where xa is the amount of money Person A owns. Person B's utility function is Uz(Xg, 1s)=3xg+2(1-s), where xBis the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Person A has the legal right to fill up theroom with smoke. If Persons A and B can exchange money for the right to smoke and make any deal that would make them both better off, whatfinal values of the smoke index s may occur?O a.s may only take the value 1/2O b. s may only take the value 1/3None of the other answers.O d. s may only take the value 2/3O e. s may take the values in [3/4,1]

The option is C. None of the other answer. Reason-:Give that,Person A smokes and Person B…

Answered: amount of money Person A owns. Person…

amount of money Person A owns. Person B's utility function is ug(Xg, 1s)= 3x8 starts with an endowment of 5 units of money. Person A has the legal right

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0,
where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's
utility function is ua(XA,S)=X4+In(1+s), where xa is the amount of money Person A owns. Person B's utility function is Uz(Xg, 1s)=3xg+2(1-s), where xB
is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Person A has the legal right to fill up the
room with smoke. If Persons A and B can exchange money for the right to smoke and make any deal that would make them both better off, what
final values of the smoke index s may occur?
O a.
s may only take the value 1/2
O b. s may only take the value 1/3
None of the other answers.
O d. s may only take the value 2/3
O e. s may take the values in [3/4,1]

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