A parent has two children living in cities with different costs of living.The cost of living in city B is 3 times the cost of living in city A.The child in city A has an income of $2,000 and the child in city B has an income of $6,000.The parent wants to give a total of $2,000 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 $1,000, even though this will buy less goods for the child in city B
B)the child in city B 3 times as much money as the child in city A.
C)the child in city B 1.50 times as much money as the child in city A.
D)the child in city A 3 times as much money as the child in city B.
E)the child in city A 1.50 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 differences. Giving each child $1,000 equally does not consider the cost of living differences but treats their consumptions equally in the utility function.

A Parent Has Two Children Living in Cities with Different