Tom and Jerry have been roommates for the past two years. During this period, th
ID: 1216081 • Letter: T
Question
Tom and Jerry have been roommates for the past two years. During this period, they bought 11 CDs together. Now that each is taking his own apartment, they are deciding how to split their possessions. Tom suggests they take five CDs each and give the extra one to Arnold, their neighbor. Jerry, on the other hand, suggests they flip a coin to decide who gets the 11th CD. Assuming they neither like nor dislike being altruistic, which of the two suggestions is Pareto efficient?
A. Tom's suggestion is Pareto Efficient B. Jerry's suggestion is Pareto efficient C. Both suggestions are Pareto efficient D. None of the suggestion is Pareto efficient
Explanation / Answer
Option (B).
Pareto efficiency is that state of resource allocation where it is impossible to make one individual better-off without making another individual worse-off.
Under Tom's suggestion, if 11th CD is given to Arnold, neither Tom nor Jerry is worse off as a result of Arnold becoming better off, so it is not Pareto efficient. But under Jerry's suggestion, as a result of the toss, if Tom gets the 11th CD then Jerry is worse-off (since Tom now has 6 CDs and Jerry has only 5), and if Jerry gets the 11th CD then Tom is worse-off (since Jerry now has 6 CDs and Tom has only 5). So this is Pareto efficient.