Consider an Edgeworth Box diagram for two people (Alice and Betty) and two goods (baseball cards as good 1, money as goo

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Consider An Edgeworth Box Diagram For Two People Alice And Betty And Two Goods Baseball Cards As Good 1 Money As Goo 1 (58.93 KiB) Viewed 35 times

Consider an Edgeworth Box diagram for two people (Alice and Betty) and two goods (baseball cards as good 1, money as good 2), under the following assumptions: • Alice and Betty each initially have $40. Alice initially has 2 baseball cards, and Betty has 8. • Alice's MRS at the initial allocation is $8 per card; Betty's is $1 per card. • If the price of baseball cards were si per card, Alice would want to buy 2 baseball cards, and Betty would want to sell all 8 of her baseball cards. • In competitive equilibrium, Betty sells 6 baseball cards to Alice for $2 each. Under these assumptions, draw the following in separate diagrams. Note that you don't have a utility function - the object of this exercise is to gain some experience drawing qualitative diagrams! However, note that there are correct coordinates for all the relevant points! (a) Draw the initial allocation W and the indifference curves passing through it. Shade the area preferred by Alice, the area preferred by Betty, and indiciate the area of potential gains from trade. (Be sure that area includes the equilibrium point!) (b) Draw an illustration of competitive equilibrium. Specifically, draw the initial allocation W. the final allocation M, the mutual) budget constraint faced by Alice and Betty, and the indifference curves passing M. (c) Draw the supply and demand curves in this two-person market for baseball cards. Indicate the equilibrium price and quantity consistent with your answer to part (b). Indicate the values of the y-intercepts of the demand and supply curves. Finally, show the quantity supplied and demanded if the price were $2 a card. (a) Now suppose the price of baseball cards is $4 a card. Draw an Edgeworth box showing the initial allocation W and the mutual) budget constraint faced by Alice and Betty. Draw the two points A and B that would be chosen by Alice and Betty subject to that budget constraint, indicating coordinates consistent with your answer to (c). Finally, draw the indifference curves passing through points W. A, and B.