A parent has two children living in cities with different costs of living.The cost of living in city B is 4 times the cost of living in city A.The child in city A has an income of $3,000 and the child in city B has an income of $12,000.The parent wants to give a total of $1,000 to her two children.Her utility function is U(C A, C B)= C A C B, where C A and C B are the consumptions of the children living in cities A and B respectively.She will choose to give
A)each child $500, even though this will buy less goods for the child in city B
B)the child in city B 4 times as much money as the child in city A.
C)the child in city A 4 times as much money as the child in city B.
D)the child in city B 2 times as much money as the child in city A.
E)the child in city A 2 times as much money as the child in city B.

Question

Quizplus · Accepted Answer

The parent's utility function is based on the consumption of both children, not their income or the cost of living directly. Giving each child $500 does not consider the cost of living differences but treats their consumptions equally in the utility function, aiming for fairness in allocation rather than adjusting for purchasing power or cost of living.

A Parent Has Two Children Living in Cities with Different