Suppose That Paul and David Have Utility Functions U =

question 7

Multiple Choice

Suppose that Paul and David have utility functions U = 4A_P + O_P and U = A_D + 5O_D, respectively, where A_P and O_P are Paul's consumptions of apples and oranges and A_D and O_D are David's consumptions of apples and oranges.The total supply of apples and oranges to be divided between them is 16 apples and 16 oranges.The "fair" allocations consist of all allocations satisfying

• A)A_D =A_P and O_D +O_P.
• B)8A_P + 2O_P is at least 80 and 2A_D + 10O_D is at least 96.
• C)4A_P + O_P is at least 80 and 2A_D + 5O_D is at least 96.
• D)A_D + O_D is at least 16 and A_S + O_S is at least 16.
• E)4A_P +O_P is at least A_D + 5O_D and A_D +5O_D is at least 4A_P + O_P.

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Definitions:

Potential Output

The highest level of economic output that can be achieved sustainably without causing inflation.

Long Run

A period in which all inputs can be adjusted by firms, and all market adjustments have been made.

Nominal Wages

The amount of money received by an employee before any deductions and not adjusted for inflation; the face value of wages.

Potential Output

The highest level of real GDP that can be sustained over the long term without increasing inflation, reflecting the economy's maximum productive capacity.