An economy has 2 individuals: individual 1 and individual 2. Each individual has 500 units of resources. Each individual uses his/her resources to produce and consume chocolate, apples, and medical care. Both individuals enjoy chocolate and apples. Eating chocolate, however, makes an individual obese. Because obesity increases the incidence of a number of diseases, an individual must obtain 2 units of medical care for every unit of chocolate the individual consumes (for the sake of simplicity, we assume that without this medical care the individual dies instantly, before any enjoyment from the chocolate) Let C1 denote chocolate consumption of individual 1, let X1denote apple consumption of individual 1, and let M1 denote the medical care consumption of individual 1:The utility function of individual 1 isU(C1;X1) =X1C1:Similarly, LetC2 denote chocolate consumption of individual 2, let X2 denote apple consumption of individual 1, and let M2 denote the medical care consumption of individual 2:The utility function of individual 2 isU(C2;X2) =X2C2:a) Assume that each agent must produce on his/her own the chocolate and apples as well as the medical care that the agent consumes, so that the resource constraint of agent 1 isC1+X1+M1= 500Determine how each individual spends his/her resources. For simplicity, assume that each individual must spend a sixth, a Öfth, or a fourth of his/her resources on chocolate (and the rest on apples and medical care). (Solve for the Nash Equilibrium)b) Assume now that each individual must still produce on his/her own all the chocolate and apples that the individual consumes but that the government now requires that each individual produces half of the medical care that the individual himself/herself requires and half of the medical care that the other individual requires. Determine how each individual now spends his/her resources. Again, for simplicity, assume that each individual must spend a sixth, a fifth, or a fourth of his/her resources on chocolate (and the rest on apples andmedical care).c) Are individuals better off in the case (a) when each individual pays only his/her own medical expenditures or in case (b) when each individual pays half of the two individuals total medical expenditure.
This question was answered on: Sep 21, 2023
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