Ike's utility function is U(x, y) = 25xy. He has 12 units of good x and 8 units of good y. Ben's utility function for the same two goods is U(x, y) = 4x + 4y. Ben has 9 units of x and 13 units of y.
A) Ike prefers Ben's bundle to his own bundle, but Ben prefers his own bundle to Ike's.
B) Ben prefers Ike's bundle to his own, but Ike prefers his own bundle to Ben's.
C) Each prefers the other's bundle to his own.
D) Neither prefers the other's bundle to his own.
E) Since they have different preferences, there is not enough information to determine who envies whom.

Question

Quizplus · Accepted Answer

To compare the two bundles, we need to compute the utility values for each of them: 
Ike's bundle: U(12,8) = 25(12)(8) = 2400 
Ben's bundle: U(9,13) = 4(9) + 4(13) = 92

Ike's utility from Ben's bundle: U(9,13) = 25(9)(13) = 2925 
Ben's utility from Ike's bundle: U(12,8) = 4(12) + 4(8) = 80

Therefore, Ike prefers Ben's bundle (2925 > 2400) but Ben prefers his own bundle (92 > 80). So the correct answer is A.

Ike's Utility Function Is U(x, Y) = 25xy