Exercise 1: Consider two households, A and B. They must decide how much to invest in a joint project. If they decide to

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Exercise 1 Consider Two Households A And B They Must Decide How Much To Invest In A Joint Project If They Decide To 1 (52.91 KiB) Viewed 75 times

Exercise 1: Consider two households, A and B. They must decide how much to invest in a joint project. If they decide to devote €y to the project, household A gets UA = 40y - y2 and household B gets Up = 60y - y2. Consider initially that these households can only decide on the investment level y. They cannot use monetary transfers to compensate whichever household loses out when taking alternative decisions. i. Is an investment level of €28 is efficient? Justify your answer. ii. What level (or levels) of investment is (or are) efficient? Prove your answer. Consider now that households A and B can decide on a level of investment and rely on monetary transfers to compensate each other if needs be. Thus, household A gets UA = 40y - y2 - t and household B gets Up = 60y - y2 + t where the transfer t is positive when household A gives money to household B and negative otherwise. iii. Is an investment of €28 efficient in this situation? Prove your answer.