Ricky Martin and Enrique Iglesias are neighbors. They each enjoy outdoor music concerts in the summer, no matter who pays for the concert. Rickys utility function is UR- xR+Ci where xR is Rickys consumption of hair gel (a private good), C is an outdoor concert, andr is a preference parameter (r >0). Enriques utility function is UEexE +Ci, where e>0 The total number of concerts is the sum paid for by each, so C= CR+CE, Ricky has income of IR and Enrique has income of IE. Both x and C have a price of 1. (a) What is Rickys marginal rate of substitution between the public good and the private good? What is Enriques? (b) What condition determines the Pareto efficient number of concerts? Hint: Dont just give me the name; write out the condition in the context of this problemm (c) Assume r- 0.5 and e-0.25. What is the Pareto efficient number of concerts?
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