Humphrey and Lauren must split 10 pounds of food and 10 gallons
of water. Suppose we can represent Humphrey‘s preferences with the
utility function UH = F 2 HWH, and Lauren‘s preferences with the
utility function UL = min{FL,WL}. Initial endowments are such that
w(FH,WH) = (2,5) and w(FL,W) = (8,5)
(a) Draw the Edgeworth box for this exchange economy (with Humphrey
on the lower vertex), including the initial endowment point and
some indifference curves for each.
(b) What is Humphrey’s marginal utility for each good?
(c) Add the contract curve to your graph.
(d) What is the ratio of the price of food to the price of water in
competitive equilibrium?
(e) Add the budget line to your graph. (f) What would the
equilibrium allocation point that Humphrey and Lauren will trade
to?
Humphrey and Lauren must split 10 pounds of food and 10 gallons of water. Suppose we...
Consider a pure exchange economy two consumers, Rachel and Lauren, and two commodities, watermelon and tomatoes. Rachel’s initial endowment is 4 units of watermelon and 3 units of tomatoes. Lauren’s initial endowment is 2 units of watermelon and 5 units of tomatoes. Rachel and Lauren have identical utility functions: Rachel’s utility is UR(WR,TR) = WRTR where WR and TR is Rachel’s quantity of watermelon and quantity of tomatoes, respectively; similarly, Lauren’s utility is UL(WL,TL) = WLTL where WL and TL...