1. Suppose person A has $1,000 and person B has $10,000. If they each have a uti

Question

1.      Suppose person A has $1,000 and person B has $10,000. If they each have a utility function of U($) = ln($), what is the ratio of MUa/MUb (marginal utility of person A divided by Marginal Utility of person B)?

2.      Given this ratio (from the previous question), describe the least efficient policy (generically speaking) that could pass a weighted CBA (weighted according to marginal utility).

3.      What would likely be recommended in place of the policy you just described, assuming there were no other policy options available that were more efficient?

Explanation / Answer

1) MUa and MUb is the derivative of the utility function

MUa =1/$a

MUb =1/$b

MUa/MUb = $b/$a

= 10000/1000 = 10

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