Joe and Martin, two roommates, have access to music in digital and analog formats. Each are initially endowed with 8 GB of high-resolution digital music and 4 vinyl LP's (analog) per month (there are a total of 16 GB's of music in digital and 8LP's in this case). Joe's preferences for music in digital and analog formats are represented by the utility function u, (D, A) = 2D + 2A, where D is the amount of digital music in GB's and A is the numberofLP's. Martin's utility function is um(D,A)=D+4A. 1. Draw an Edgeworth box to show the initial endowments and the indifference curves (going through the initial endowments) for Joe and Martin. What are their utility levels from the initial endowments? 2. Calculate the marginal rates of substitution for Joe and Martin. Provide an economic interpretation. 3. Do the initial endowments represent a Pareto efficient allocation? Discuss.

Joe and Martin, two roommates, have access to music in digital and analog formats. Each are initially endowed with 8 GB of high-resolution digital music and 4 vinyl LP's (analog) per month (there are a total of 16 GB's of music in digital and 8LP's in this case). Joe's preferences for music in digital and analog formats are represented by the utility function u, (D, A) = 2D + 2A, where D is the amount of digital music in GB's and A is the numberofLP's. Martin's utility function is um(D,A)=D+4A. 1. Draw an Edgeworth box to show the initial endowments and the indifference curves (going through the initial endowments) for Joe and Martin. What are their utility levels from the initial endowments? 2. Calculate the marginal rates of substitution for Joe and Martin. Provide an economic interpretation. 3. Do the initial endowments represent a Pareto efficient allocation? Discuss.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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