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Practice Questions 2

Question1

Discuss the concept of the utility possibility frontier.

Question 2

Consider an economy with two people, Victoria and Albert, and two commodities, tea and

crumpets.  Currently, Victoria and Albert would both be willing to substitute two cups of tea for one crumpet.  Further if the economy were to produce one less cup of tea, the resources

released from tea production could be used to produce three more crumpets.  Is the allocation

of resources in the economy Pareto efficient?  If not should there be more tea or more crumpets?

Question 3

In a two-person (Barbara and Jones) economy total fixed income $100 is split between them.

For Barbara, the marginal utility of income is: MUB=400-2IB while for Jones the marginal utility is MUJ=400-6IJ.  Where IB  and IJ  are amounts of income to Barbara and Jones respectively.

(a) What is the optimal distribution if the social welfare function is additive utilitarian?

(b) What is the optimal distribution if the society values only the utility of Jones?  What if the reverse is true?

(c) If the marginal utility of income for both Barbara and Jones is constant: MUB=MUJ=400, how your results will change?