Consider the problem of utility over territory. Let’s start simply with a one-dimensional representation. Consider two actors, 1

and 2, with utility functions defined over a single-dimensional

issue space X = [0, 1], but where the actors can own sections or

“provinces” of the interval. The boundaries between sections are

defined by a vector B = (b1, b2, b3, . . . , bn, 1).

Thus, there are n+ 1 provinces. Define a “size” vector containing the lengths of

each province, S = (b1, b2 − b1, b3 − b2, . . . , 1 − bn). Define for

each actor an “ownership” vector Oi with 1s in the place of the

provinces that it owns and 0s elsewhere.

1. Assume that each actor’s utility function is a simple sum of

how much of the space they own so ui=∑n+1,j=1, oj, sj

(a) Can the players both be made better off by exchanging

existing provinces?

(b) Can the players both be made better off by altering the

boundaries of the existing provinces while preserving the

ownership structure?

(c) Can the players both be made better off by reducing the

number of provinces – for instance, by consolidating

contiguous provinces that are owned by the same actor?

2. Now assume that the utility function is a function of the sum

of the squares of the provinces owned, indicating that there are

increasing returns to the size of a province ui=∑n+1,j=1, (oj, sj)^2

(a) Can the players both be made better off by exchanging

existing provinces (without doing anything else)?

(b) Can the players both be made better off by reducing the

number of provinces – for instance, by consolidating

contiguous provinces that are owned by the same actor?

(c) If the actors are free to adjust both the number of

provinces and the ownership structure, what set of

boundaries is Pareto optimal with this utility function?

2.2 (see formula in the attachments) Consider two states, state 1 and state 2, which can unilaterally

set their tariff rates on imported goods, ti ≥ 0. Each state has an

ideal level for its own tariff, and prefers that the other

side’s tariff be 0, Assume that each side’s utility declines

with the distance between the tariff levels and their ideal point,

as follows

1. Draw the t1, t2 quadrant and draw in the ideal points for each

player.

2. Draw in sample indifference curves for the two states around

their ideal points. What shape are they?

3. Draw in the contract curve between the two ideal points. What

shape is it and why? What equation describes it?

4. The contract curve divides the t1, t2 quadrant into two regions.

How do they differ in terms of how the players could realize

joint gains in each region?

2.3 Consider the utility function u(x) = xρ, where ρ > 0 and x ∈ [0,

1]. Under what conditions would a player with such preferences

be risk acceptant, risk neutral, and risk averse?