Ike’s utility function is U(x, y) = 25xy. He has 12 units of good x and 8 units
ID: 1190500 • Letter: I
Question
Ike’s utility function is U(x, y) = 25xy. He has 12 units of good x and 8 units of good y. Ben’s utility function for the same two goods is U(x, y) = 4x + 4y. Ben has 9 units of x and 13 units of y.
a. Ike prefers Ben’s bundle to his own bundle, but Ben prefers his own bundle to Ike’s.
b. Ben prefers Ike’s bundle to his own, but Ike prefers his own bundle to Ben’s.
c. Each prefers the other’s bundle to his own.
d. Neither prefers the other’s bundle to his own.
e. Since they have different preferences, there is not enough information to determine who envies whom.
It says this answer is A but I don't understand why.. help me!
Explanation / Answer
Given
Ike’s basket is (x, y) = (12, 8)
Ben’s basket is (x,y) (9, 13).
According to Ike, the utility function is U(x,y) = 25xy
Ike's basket utility = 25 * 12 * 8 = 2400
Ben's basket utility = 25 * 9 * 13 = 2925
Hence, According to Ike U(9,13) > U(12,8). Ike prefers Ben's basket rather than his own.
According to Ben, utility function is U(x,y) = 4x + 4y
Ike's basket utility = 4*12 + 4*8 = 80
Ben's basket utility = 4*9 + 4*13 = 88
Hence, According to Ben U(9,13) > U(12,8). Ben prefers his own basket rather than Ike's basket.
Option a is the right answer.