Remember Bonnie and Clyde from your workbook? Suppose that their total profits are 160H, where H is the number of hours they work per year.Their utility functions are, respectively, U_B(C_B, H )= C_B - 0.04H ² and U_C(C_C, H )= C_C - 0.01H ², where C_B and C_C are their private goods consumptions and H is the number of hours they work per year.If they find a Pareto optimal choice of hours of work and income distribution, the number of hours they work per year must be A)750. B)1,600. C)850. D)1,700.

Question

Quizplus · Accepted Answer

For a Pareto optimal choice, both Bonnie and Clyde's marginal utilities of income must equal their marginal disutility of labor. Given their utility functions, we can equate the marginal utility of income (which is derived from the total profits, 160H) to the marginal disutility of labor (given by the coefficients in front of H in their utility functions, 0.04 for Bonnie and 0.01 for Clyde). Solving for H where these are equal for both individuals leads to the conclusion that they must work 750 hours per year to achieve Pareto optimality.

Remember Bonnie and Clyde from Your Workbook? Suppose That Their