A Parent Has Two Children Living in Cities with Different

question 25

Multiple Choice

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 $3,000 and the child in city B has an income of $9,000. The parent wants to give a total of $2,000 to her two children. Her utility function is U(C_A, C_B) = C_AC_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) each child $1,000, even though this will buy less goods for the child in city B.
• C) the child in city A 3 times as much money as the child in city B.
• D) the child in city B 1.50 times as much money as the child in city A.
• E) the child in city A 1.50 times as much money as the child in city B.

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Definitions:

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