A Parent Has Two Children Living in Cities with Different

question 8

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 $4,000 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 1.50 times as much money as the child in city A.
• B) the child in city A 3 times as much money as the child in city B.
• C) the child in city B 3 times as much money as the child in city A.
• D) each child $2,000, even though this will buy less goods for the child in city B.
• E) the child in city A 1.50 times as much money as the child in city B.

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Definitions:

Real GDP

Real Gross Domestic Product, which adjusts the GDP for inflation to show the actual worth of an economy's total production of goods and services within a year.

Real Terms

Refers to economic measures adjusted for inflation, enabling comparison of purchasing power across different times.

Population

The total number of people inhabiting a particular area, country, or region.

Net Exports

The net amount obtained when a nation's overall imports are subtracted from its overall exports.