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Consider an exchange economy consisting of two people, A and B, endowed with two goods, 1 and 2. Person A is initially endowed with A
Consider an exchange economy consisting of two people, A and B, endowed with two goods, 1 and 2. Person A is initially endowed with A = (3,7) and person B is initially endowed with B = (9,5). Person A's preferences are given by UA (xA1, xA2) = 0.4 ln xA1 + 0.6 ln xA2 and Person B's preferences are given by UB(xB1, xB2) = (xB1)0.4(xB2)0.6. Which one of the following represents the set of Pareto optimal allocations?
a. xA1 = xA2
b. xA1 = (1/2)xA2
c. xA1 = (2/3)xA2
d. xA1 = (3/2)xA2
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