Suppose both Smith and Jones utility functions of U(X,Y) = X1/2Y1/2. Smith is endowed with (X,...

Suppose both Smith and Jones utility functions of U(X,Y) = X1/2Y1/2. Smith is endowed with (X, Y) = (9,25) and Jones is endowed with (X, Y) = (25,9).

a. Draw an Edgeworth box with indifference curves through this endowment.

b. At what combinations of X and Y are both better off (i.e., are Pareto Improving)?

c. At what combinations of X and Y are there no more gains from trade (i.e., are Pareto Efficient)?

d. If they agreed on a price of one X for one Y, would they be better off?

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Expert Solution

Rahul Sunny answered 2 weeks ago

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