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1. A fifirm that is located in country H, where price levels are p = (1,2), needs to
send one of its two employees to its branch in country F. However, in country
F price levels are p
0
= (3,1), so the fifirm will have to pay additional salary to
ensure that its employee is equally well-off in country F as she was in country
H. Suppose the utility functions of the two employees are
u1(x1, x2) = lnx1 +lnx2 and u2(x1, x2) = x1 + x2.
The two employees are otherwise identical, including current salary. If the fifirm
wants to minimize the additional salary it needs to pay, which employee should
it send? Explain.
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