In: Economics
2. The utility function for Abe (A) and Bro (B) are as follow:
UA = XAYA
UB = XBYB0.5
Where the initial endowment of X and Y are:
XA = 20, YA = 20, XB = 8, YB = 100
a) Calculate the marginal rate of substitution of X and Y for
Abe and Bro at their initial endowment
point.
b) Assume that the amount of X and Y is fixed, draw the
Edgeworth diagram and label the initial
allocation for both consumers as ‘W’.
c) Next, explain exchanges that are mutually beneficial for both
consumers. In your explanation,
please include the discussion on the different goods that each
consumer would like to offer, the
concept of Pareto improvement, Pareto efficient and Pareto
inefficient allocations.