Re: ISI Interview Question

Posted by Asd1995 on Jun 18, 2017; 7:31am
URL: http://discussion-forum.276.s1.nabble.com/ISI-Interview-Question-tp7605699p7605765.html

So after a bit of thought, here's my two cents;

Since we dont have a defined welfare function, we know that if preferences are convex, there exists an allocation which is fair and pareto optimal (Hal Varian). If everyone has the same preferences, the only such allocation is where everyone has the same utility.

Now if transfer from c1 to c2 results in a loss, and we still want to ensure fairness, we still need to give everyone the same bundle since everyone still has the same preference. So both cities will have same bundle, but this will not maximize total utility. Still, it is a fair and a pareto efficient outcome.

If preferences are concave a fair and PE allocation may not exist, it would depend on the nature of the function.