Franco and Gianni Have the Same Tastes and Consume Only

question 33

Multiple Choice

Franco and Gianni have the same tastes and consume only two goods, wine and pizza.Franco lives in Milano and spends 100,000 lire per week.It costs him 5,000 lire for a bottle of wine and 5,000 lire for a pizza.Gianni lives in Napoli.It costs him 4,000 lire for a bottle of wine and 6,000 lire for a pizza.At those prices, he chooses to buy 10 bottles of wine and 6 pizzas per week.

• A)Franco is better off with his own budget than he would be with Gianni's.
• B)Gianni is better off with his own budget than he would be with Franco's.
• C)Franco and Gianni violate WARP.
• D)Franco and Gianni are equally well off.
• E)There is not enough information to determine whether either would prefer the other's bundle.

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Definitions:

Debenture

A type of debt instrument that is not secured by physical assets or collateral but is based on the issuer's creditworthiness and reputation.

Risk Premium

The additional return over the risk-free rate that an investment is expected to yield, compensating investors for taking on higher risk.

Default Risk

The risk of loss arising from a debtor failing to make required payments on their debt obligation.

Cost Of Borrowing

The total expense that a borrower pays to secure and utilize a loan, including interest rates, fees, and other charges.