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In: Economics

Adam and Eve are stranded on a desert island. There are only two goods on the...

Adam and Eve are stranded on a desert island. There are only two goods on the island: Apples (A) and Bananas (B). The utility functions of Adam and Eve are U^Adam(DA, DB) = (DA)^1/2 (DB)^1/2 and U^Eve(DA, DB) = (DA)^1/2 (DB)^1/2 respectively (they have the same preferences). Total endowments on the island are 20 Apples and 60 Bananas. Adam owns all the bananas and Eve all the apples.

(a) Draw the Edgeworth box for this exchange economy, including Adam and Eve’s indifference curves and endowments.

(b) Write the equation of the contract curve of this economy.

(c) Will Adam consume any apple in a competitive equilibrium?

(d) Now assume U^Adam(DA, DB) = U^Eve(DA, DB) = DA + DB. What is the new contract “curve”? (Hint: note the quotation marks and recall the condition that must be satisfied for the contract curve, i.e. MRS for the consumers must be equal.)

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Expert Solution

Rahul Sunny answered 1 year ago
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