Question #99875

Alice and Bob have £100, 000 to bequeath to their two children, Carrie and Danny.

Bob’s preferences are represented by

U(xc, xd) = xc + xd

where xc is the amount of money left to Carrie, and xd is the amount of money left to Danny.

Alice’s preferences are represented by

U(xc, xd) = min{xc, xd}

That is, Alice’s utility is equal to the minimum bequest left for either of her children: for

instance, if Danny received £50 and Carrie received £40, Alice would obtain a utility of 40.

Whichever parent survives the longest decides how to arrange their will, and so, decides the

sums bequeathed to each child.

a)In what sense do Alice and Bob face a budget constraint? In separate graphs, one

each for Alice and for Bob, draw the parent’s budget constraint. (Hint 1: Think of the two

bequests as goods from which Alice and Bob derive utility. Hint 2: What are these goods’

prices? Hint 3: Remember to label all graphs, axes, and intercepts.)

Bob’s preferences are represented by

U(xc, xd) = xc + xd

where xc is the amount of money left to Carrie, and xd is the amount of money left to Danny.

Alice’s preferences are represented by

U(xc, xd) = min{xc, xd}

That is, Alice’s utility is equal to the minimum bequest left for either of her children: for

instance, if Danny received £50 and Carrie received £40, Alice would obtain a utility of 40.

Whichever parent survives the longest decides how to arrange their will, and so, decides the

sums bequeathed to each child.

a)In what sense do Alice and Bob face a budget constraint? In separate graphs, one

each for Alice and for Bob, draw the parent’s budget constraint. (Hint 1: Think of the two

bequests as goods from which Alice and Bob derive utility. Hint 2: What are these goods’

prices? Hint 3: Remember to label all graphs, axes, and intercepts.)

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