Suppose there are two persons, 1 and 2, who consume one good in the quantities x1 and x2, respectively, whereby x1+ x2 = X = 10. The utility functions of 1 and 2 are respectively:
u1= 4x1
u2= 4 (lnx2)
- In numbers, what is the maximum possible utility person 1 could achieve ie., if 1 gets all X?
- If x1= 10 - e2, what is the maximum value of person 2's utility?
- Find the equation of the UPF. Express this equation with u2 on the left and everything else including u1 on the right (this expression will contain ln).
- Write the equation of the utilitarian social welfare function, W, in terms of x2
- According to utilitarianism, what is the social welfare maximizing allocation to person 2, x2*?
- According to utilitarianism, what is the social welfare maximizing allocation to person 1, x1*?
- What is the maximum numerical value of social welfare, W*?