A parent has two children living in cities with different costs of living. The c
ID: 1129709 • Letter: A
Question
A parent has two children living in cities with different costs of living. The cost of living in city B is 3 times the cost of living in city A. The child in city A has an income of $2,000 and the child in city B has an income of $6,000. The parent wants to give a total of $1,000 to her two children. Her utility function is U(CA, CB)=CACB, where CA and CB are the consumptions of the children living in cities A and B respectively. She will choose to give
a. the child in city B 3 times as much money as the child in city A.
b. the child in city B 1.50 times as much money as the child in city A.
c. each child $500, even though this will buy less goods for the child in city B.
d. the child in city A 3 times as much money as the child in city B.
e. the child in city A 1.50 times as much money as the child in city B.
Explanation / Answer
Answer : Given, income of child in city A = $2000 and income of child in city B = $6000. As the living cost in city B is 3 times of cost of city A, the real income of both child is equal. Therefore, she , i. e., parent will choose to give c. each child $500 , even though this will buy less goods for the child in city B .
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