2) Suppose there are two consumers in an economy: consumer A and consumer B. They have two goods (x and y) allocated between them. A has 5 units of x, B has 15 units of x. A has 5 units of y, B has 5 units of y. Consumers have identical utility functions given by U=x*y. a) Draw the Edgeworth box showing the current allocation of the two goods. Put consumer A in the lower left-hand corner, and consumer B in the upper right-hand corner. b) To your Edgeworth box add the two consumers' indifference curves going through the initial allocation point, clearly showing that the allocation is not efficient. Explain why it is not efficient, using the MRS calculations. c) Suggest a trade that would increase both consumers' utility. (Several correct answers are possible). Is your proposed allocation efficient? d) What does the contract curve look like in this economy? Derive its formula and add its graph to your Edgeworth box.
2) Suppose there are two consumers in an economy: consumer A and consumer B. They have two goods (x and y) allocated between them. A has 5 units of x, B has 15 units of x. A has 5 units of y, B has 5 units of y. Consumers have identical utility functions given by U=x*y. a) Draw the Edgeworth box showing the current allocation of the two goods. Put consumer A in the lower left-hand corner, and consumer B in the upper right-hand corner. b) To your Edgeworth box add the two consumers' indifference curves going through the initial allocation point, clearly showing that the allocation is not efficient. Explain why it is not efficient, using the MRS calculations. c) Suggest a trade that would increase both consumers' utility. (Several correct answers are possible). Is your proposed allocation efficient? d) What does the contract curve look like in this economy? Derive its formula and add its graph to your Edgeworth box.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:2) Suppose there are two consumers in an economy: consumer A and consumer B. They have two
goods (x and y) allocated between them. A has 5 units of x, B has 15 units of x. A has 5 units of y, B
has 5 units of y. Consumers have identical utility functions given by U=x*y.
a) Draw the Edgeworth box showing the current allocation of the two goods. Put consumer A in
the lower left-hand corner, and consumer B in the upper right-hand corner.
b) To your Edgeworth box add the two consumers' indifference curves going through the initial
allocation point, clearly showing that the allocation is not efficient. Explain why it is not efficient,
using the MRS calculations.
c) Suggest a trade that would increase both consumers' utility. (Several correct answers are
possible). Is your proposed allocation efficient?
d) What does the contract curve look like in this economy? Derive its formula and add its graph to
your Edgeworth box.
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