Question

You are now asked to consider a world with two people, Jane and Jack. Jack is a farmer. Jane owns the land on which Jack farms and does not produce any output herself. There is only one good in this world, grain.

a. Use a model of decision making under scarcity to show the allocation that maximises Jane’s economic rent when she can coerce Jack. Label all relevant axes, points and curves on your model.

b. Use a separate model of decision making under scarcity to show the set of Pareto efficient allocations result from Jack being able to bargain with Jill, but with Jill still being able to make a take-it-or-leave-it offer. Label all relevant axes, points and curves on your model.

c. Thinking in general terms now, explain why a point on the biological survival constraint is lower when a person has more hours of free time. Why does the curve also get flatter when a person works less? [max words: 150]

d. Again, thinking in general terms, explain the difference between a biologically feasible set and an economically feasible set. [max words: 150]

Answer 1

(a). As can be seen below in figure 1, jane's biological survival constraint is given and the combined technically feasible contraint of both jack and jane is given. The allocation where Jane can coerce jack to farm and maximize her economic rent is point E, where the MRS (of Jane's survival constraint) = MRT (of combined technical constraint). Here, Jane works for 24-h hours and enjoyes h hours of free time and she gets OB amount of grain,whereas Jack gets OC amount of grains. The economic rent earned by Jane is area of rectangle BCFE.

(b). The model of decision making where Jack can bargain and Jane can offer a take-it-or-leave -it

proposal is shown in figure below. Here, Jane has her reservation indifference curve above her biological constraint. All the allocations between the lens made by Reservation IC and the combined technically feasible constraint are pareto effeicient. But the Jane will offer take-it-or-leave-it proposal at point E1, where the MRS(of reservation IC)=MRT(of technical constraint). At this offer Jack is working for 24-g hours and enjoying g hours of free time with OS amount of grains. While, Jane will have OR amount of grains and her economic rent here is given by the area of rectangle SRQE1.

(c). A point on biological survival constraint is lower when a person has more hours of free time because here MRS<MRT. THe biological constraint also gets flatter with less work because limited grain is produced over and above what is biologically needed by the person. If we move to left and work more then more grain will be produced over and above needed by the body.

(d). Biologically feasible set is the set of allocations which can be technically produced and required for the nutritional value for the person to survive (allocations in the lens made by biological constraint and the technical constraint). Whereas, economically feasible set is the set of allocations are make both the persons better off and are pareto efficient allocations ( allocations in the lens made by reservation indifference curve and technical constraint).