Imagine a Primitive Society in Which There Are Two Goods

question 77

Essay

Imagine a primitive society in which there are two goods: food and shelter. The utility functions for two representative members of the society, Jane and Paul, are given below.
Jane's utility function:
U^J = 25F^0.5S^0.5
Paul's utility function:
U^P = 50F^0.75S^0.25
where F = units of food, and S = units of shelter.
a. Determine the marginal rate of substitution for each individual.
b. The current prices of food and shelter are $12 and $6, respectively. Determine the proportions in which Jane and Paul should consume food and clothing to achieve an exchange equilibrium.

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Definitions:

Redistribution

The transfer of income, wealth, or resources from certain individuals or groups to others by means of a social mechanism such as taxation, charity, welfare, or public services.

Unexpectedly High

A term describing something that surpasses anticipated levels or estimates, often leading to surprise or a need for adjustment.

Shoeleather Costs

The increased costs of transactions caused by inflation, such as the time and effort spent to avoid holding onto cash that is rapidly losing value.

Redistributional Effects

The impact of policies or economic conditions on the distribution of income or wealth among the population, potentially altering inequality levels.