1. A situation is called Pareto e?cient if there is no way in which we can make at least one person better off without harming at least one other person.
Suppose we have to allocate $100 between two individuals. What are the Pareto effcient allocations? (Assume both enjoy money).
2. Suppose instead that we'll play a lottery. With probability p, the money will be given to person 1, and with probability 1 - p we'll give it to person 2.
(a) What is the optimal value of p for person 1?
(b) What is the optimal value of p for person 2?
(c) Explain why all values of p are Pareto effcient.