2. The utility function for Abe (A) and Bro (B) are as follow: UA = XAYA...

2. The utility function for Abe (A) and Bro (B) are as follow:

UA = XAY_A

U_B = X_BY_B^0.5

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.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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