Tom and Jerry have been roommates for the past two years.During this period,they bought 11 CDs together.Now that each is taking his own apartment,they are deciding how to split their possessions.Tom suggests they take five CDs each and give the extra one to Arnold,their neighbor.Jerry,on the other hand,suggests they flip a coin to decide who gets the 11th CD.Assuming they neither like nor dislike being altruistic,which of the two suggestions is Pareto efficient?

Question

Quizplus · Accepted Answer

Pareto efficiency means that the allocation cannot be improved for at least one person without making someone else worse off.

In Tom's suggestion, Arnold gains an extra CD but neither Tom nor Jerry gain anything more than five CDs each. If either Tom or Jerry would prefer to have the 11th CD instead of giving it to Arnold, then Tom's suggestion is not Pareto efficient.

In Jerry's suggestion, the allocation of CDs is determined by chance and both Tom and Jerry have an equal probability of getting the 11th CD. This means that neither Tom nor Jerry can be made better off without making the other worse off, so the allocation is Pareto efficient. Therefore, Jerry's suggestion is Pareto efficient.

Tom and Jerry Have Been Roommates for the Past Two