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?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.3P

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