Asked by Nicole Nagatoshi on Jun 29, 2024
Verified
A parent has two children living in cities with different costs of living.The cost of living in city B is 3 times the cost of living in city A.The child in city A has an income of $2,000 and the child in city B has an income of $6,000.The parent wants to give a total of $1,000 to her two children.Her utility function is U(C A, C B) C A C B, where C A and C B are the consumptions of the children living in cities A and B respectively.She will choose to give
A) the child in city B 3 times as much money as the child in city A.
B) the child in city B 1.50 times as much money as the child in city A.
C) each child $500, even though this will buy less goods for the child in city B.
D) the child in city A 3 times as much money as the child in city B.
E) the child in city A 1.50 times as much money as the child in city B.
Cost of Living
The amount of money needed to sustain a certain standard of living by affording basic expenses such as housing, food, taxes, and healthcare.
Utility Function
A representation in economics of how a consumer ranks different goods or services, based on the level of satisfaction they provide.
Consumption
Consumption involves the use of goods and services by households, constituting one of the primary components of economic activity and a key indicator of economic health.
- Recognize the impact of income and cost of living differences on financial decisions and utility.
Verified Answer
ZK
Zybrea KnightJul 06, 2024
Final Answer :
C
Explanation :
The utility function U(CA, CB) = CA * CB implies the parent values the product of the consumptions of both children equally. Given the cost of living differences, equal distribution ($500 each) maximizes the product of their consumptions despite the purchasing power disparity.
Learning Objectives
- Recognize the impact of income and cost of living differences on financial decisions and utility.