18. Ernie\'s utility function is U, y) 32xy. He has 10 units of good x and 8 uni

Question

18. Ernie's utility function is U, y) 32xy. He has 10 units of good x and 8 units of good y. Waldo's utility function for the same two goods is U(x, y) 3x+5y. Waldo has 9 units of x and 13 units of y. a. Waldo prefers Ernie's bundle to his own, but Ernie prefers his own bundle to Waldo's. b. Each prefers the other's bundle to his own. c. Neither prefers the other's bundle to his own. d. Emie prefers Waldo's bundle to his own bundle, but Waldo prefers his own bundle to Enie's. Since they have different preferences, there is not enough information to determine who envies whom. e.

Explanation / Answer

18.

Correct Answer:

D

Working note:

With Ernie’s bundle, Ernie’s utility = 32*10*8 = 2560

With Waldo’s bundle, Ernie’s utility = 32*9*13 = 3744

So, Ernie prefers Waldo’s bundle, as it gives higher utility.

With Waldo’s bundle, Waldo’s utility = 3*9 + 5*13 = 92

With Ernie’s bundle, Waldo’s utility = 3*10 + 5*8 = 70

Since Waldo get higher utility with his own bundle, then he prefers his own bundle.

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