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Unformatted text preview: Practice Problems 1 Pareto Efficiency and the UPF Instructor: Todd Sarver Econ 310-2, Fall 2011 These problems do not need to be turned in. Solutions to these problems will be presented by the TAs in the discussion sessions. I strongly encourage you to solve each problem before going to the discussion session. 1 Pareto Efficiency Consider an economy with two consumers, Patricia (P) and Ricardo (R), and a single divisible good x . (Divisible means that the good can be consumed in any quantity, such as 1, 2 . 357, 4 1 2 , and so on. In contrast, indivisible means that it can only be consumed in whole-number quantities like 1, 2, and 3. Unless stated explicitly otherwise, you should always assume goods are divisible.) Suppose Patricia and Ricardo are friends and therefore care about each others utility. Patricia likes good x and also knows the Ricardo likes good x , so her utility function takes into account both her consumption of the good ( x p ) and Ricardos ( x r ). In particular, suppose her utility drops to zero if Ricardo gets less than 5 units of x : u p ( x p ,x r ) = if x r < 5 x p if x r 5 Similarly, Ricardos utility function takes into account both his consumption and Patricias:...
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- Spring '08