3. Sheila and Bruce are going to the park. They are bringing a total of 18 ounces of chips (x) and 18 ounces of pretzels (y). Sheila and Bruce have preferences that can be represented by: US(x,y) = 3lnxs + lnys and UB(x,y) = lnxB+lny. Consider the equal division of the endowment where each receives 9 ounces of each good. a) An allocation in an exchange economy is called envy free if each individual prefers his or her own allocation of goods to the allocation received by any other individual. Is the equal division envy free? b) Is the equal division a Pareto efficient allocation of chips and pretzels? c) Given their marginal rates of substitution at the equal division allocation who values chips more highly? What will be the pattern of trade associated with every mutually beneficial trade?
3. Sheila and Bruce are going to the park. They are bringing a total of 18 ounces of chips (x) and 18 ounces of pretzels (y). Sheila and Bruce have preferences that can be represented by: US(x,y) = 3lnxs + lnys and UB(x,y) = lnxB+lny. Consider the equal division of the endowment where each receives 9 ounces of each good. a) An allocation in an exchange economy is called envy free if each individual prefers his or her own allocation of goods to the allocation received by any other individual. Is the equal division envy free? b) Is the equal division a Pareto efficient allocation of chips and pretzels? c) Given their marginal rates of substitution at the equal division allocation who values chips more highly? What will be the pattern of trade associated with every mutually beneficial trade?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question

Transcribed Image Text:3. Sheila and Bruce are going to the park. They are bringing a total of 18 ounces of chips
(x) and 18 ounces of pretzels (y). Sheila and Bruce have preferences that can be
represented by: US(x°,y°) = 3lnvx+ Iny and UB(x",y") = Inx + Ivy". Consider
the equal division of the endowment where each receives 9 ounces of each good.
a) An allocation in an exchange economy is called envy free if each individual
prefers his or her own allocation of goods to the allocation received by any other
individual. Is the equal division envy free?
b) Is the equal division a Pareto efficient allocation of chips and pretzels?
c) Given their marginal rates of substitution at the equal division allocation who
values chips more highly? What will be the pattern of trade associated with every
mutually beneficial trade?
d) Letting P represent the terms of trade (ounces of pretzels per ounce of chips) then
what is the range of the terms of trade associated with mutually beneficial trades?
e) Find one trade that will make both Sheila and Bruce strictly better off (you must
verify that it makes both Sheila and Bruce better off).
f) Illustrate in an Edgeworth box diagram the endowment point, a pair of
indifference curves passing through the equal division and the trade that makes
both of them better off (from part (e)).
Expert Solution

This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps with 2 images

Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you


Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON

Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON


Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON

Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON

Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning

Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning

Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education