An individual A is represented by the utility function uA(x) = √x. Another individual B is represented by the utility function uB (x) = x. Both own a sure income of $400 and a risky income that pays $100 with probability 1/4 if it is a good day tomorrow and zero with probability 3/4 if it is a bad day tomorrow. Find the redistribution of their incomes and gambles that makes B as happy as possible, without making A worse off. After the redistribution, what is B’s utility?
An individual A is represented by the utility function uA(x) = √x. Another individual B is represented by the utility function uB (x) = x. Both own a sure income of $400 and a risky income that pays $100 with probability 1/4 if it is a good day tomorrow and zero with probability 3/4 if it is a bad day tomorrow. Find the redistribution of their incomes and gambles that makes B as happy as possible, without making A worse off. After the redistribution, what is B’s utility?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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An individual A is represented by the utility function uA(x) = √x.
Another individual B is represented by the utility function uB (x) = x.
Both own a sure income of $400 and a risky income that pays $100 with probability 1/4 if
it is a good day tomorrow and zero with probability 3/4 if it is a bad day tomorrow.
Find the redistribution of their incomes and gambles that makes B as happy as possible,
without making A worse off.
After the redistribution, what is B’s utility?
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