A small economy has only two consumers, Zeke and Maude.Zeke's utility function is U(x, y)= x + 48y^1/2.Maude's utility function is U(x, y)= x + 4y.At a Pareto optimal allocation in which both individuals consume some of each good, how much y does Zeke consume? A)36 B)12 C)5 D)10 E)We can't tell without knowing the initial endowments.

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Quizplus · Accepted Answer

Zeke's marginal utility of y is 24y^-1/2, and Maude's marginal utility of y is 4. At a Pareto optimal allocation, the marginal utilities of y for the two consumers must be equal, so we have 24y^-1/2 = 4. Solving for y, we get y = 36.

A Small Economy Has Only Two Consumers, Zeke and Maude