Say Anna's utility function was given by UA = (MA)(MM), where MA is Anna's wealth and MM is Marie's wealth. Initially, Anna has 160 units of wealth and Marie has 40. In order to maximize her utility Anna should
A)transfer all her wealth to Marie.
B)transfer 60 units to Marie.
C)keep all her wealth for herself.
D)get 40 units from Marie.

Question

Quizplus · Accepted Answer

In order to maximize her utility function UA = (MA)(MM), Anna needs to increase both her own wealth (MA) and Marie's wealth (MM). However, since Anna's initial wealth is already four times as much as Marie's, transferring all her wealth to Marie would not increase the product (MA)(MM) significantly. Keeping all her wealth for herself would also not be optimal since her utility depends on both her own wealth and Marie's wealth. Finally, getting 40 units from Marie would not increase the product (MA)(MM) either. Therefore, the best choice would be to transfer some of Anna's wealth to Marie, without giving away everything. Transferring 60 units to Marie would increase her wealth to 100 (a 150% increase) and Anna's wealth to 1000 (a 525% increase), resulting in a product (MA)(MM) of 100 x 1000 = 100000, which is the highest possible value given the initial conditions.

Say Anna's Utility Function Was Given by UA = (MA)(MM)