An Economy Consists Of Two Consumers Ann And Bob They Consume Two Goods Denoted By X1 And X2 Assume That The Goods 1 (94.08 KiB) Viewed 30 times
An "economy” consists of two consumers: Ann and Bob. They consume two goods, denoted by X1 and X2. Assume that the goods are perfectly divisible. Initially, Ann has 10 units of X1 and 10 units of x2. Also, initially Bob has 10 units of X1 and 10 units of x2. Thus, each consumer has the same amount of each good as the other consumer. Consumers' preferences are different. Ann's preferences are given by the utility function u 4(x1, x2) = x x, and Bob's preferences are given by the utility A 3 function ub(X1, X2) ) = x+ 2. 1 2 = 2 2 3 1 3 =
1. What are the total resources in the “economy”? Plot an Edgeworth box and show the allocations which reflect the initial endowments. 2. Provide a general definition of a Pareto-efficient allocation. Show formally а. whether the initial endowment allocations for Ann and Bob are Pareto- efficient (use the consumers' MRS). 3. What is a contract curve? Calculate the contract curve for Ann and Bob and show it in the Edgeworth box.
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