Question

40. Morris has the utility function U(b, w) 3b +3w and Philip has the utility function U(b, w) - bw, where b is the number of books consumed per month and w is bottles of wine consumed per month. If we draw an Edgeworth box with books on the horizontal axis and wine on the vertical axis and if we measure Morris's consumptions from the lower left corner of the box, then the contract curve contains a. a straight line running from the upper right corner of the box to the lower left b, a curve that gets steeper as you move fron left to right. c. a straight line with slope 1/1 passing through the lower left corner of the box. MM buok a straight line with slope 1/1 passing through the upper right corner of the box. a curve that gets flatter as you move from left to right. e. ANS: D DIF: 3 41. Morris has the utility function U(b, w) 4b +4w and Philip has the utility function U(b, w)- bw, where b is the number of books consumed per month and w is bottles of wine consumed per month. If we draw an Edgeworth box with books on the horizontal axis and wine on the vertical axis and if we measure Morris's consumptions from the lower left corner of the box, then the contract curve contains a. /a curve that gets steeper as you move from left to right. b,/ a straight line with slope 1/1 passing through the upper right corner of the box. 0 a straight line with slope 1/1 passing through the tower teft corner of the box. d. a straight line running from the upper right corner of the box to the lower left. e. a curve that gets flatter as you move from left to right. ANS: B DIF: 3

Answer 1

u^M (b, w) = 3 b + 3w, u^P (b, w) = bw contract curve: locus of all pareto optimal points: - MRS_bw^M = MRS_bw^P 1 = w^P/b^p implies Thus w^p = b^p Ans 80 contract curve eqn w^p = b^p Ans option D) contract curve eqn would start form upper Right corner from where consn of Phillip starts, u^M (b, w) = 4b + 4w, u^p (b, w) = bw, Now again at P.O. MRS_bw^M = MRS_bw^P. (partial differential u/partial differential b/partial differential u/partial differential w)^M = (partial differential u/partial differential b/partial differential u/partial differential w)^P 1 = w^p/b^p implies 80 b^p = w^p option B): contract curve. The contract curve need not to tog through the lower left [pass] corner, bwz if total endowment is w^bar, b^bar. So that b^p + b^m = b^bar & w^p + w^m = w^bar then for contract curve: b^bar - b^m = w^bar - w^m. or w^m = (w^bar - b^bar) + b^m.