Question
A small island economy consists of two individuals. There is no production - just (potentially) trade and consumption. Alice has utility function U(X1, X2) =
A small island economy consists of two individuals. There is no production - just (potentially) trade and consumption. Alice has utility function U(X1, X2) = X1 X2 and is endowed with 2 units of X1 and 10 units of X2. Bob has utility function U(X1, X2) = 2X1 + X2 and is endowed with 10 units of X1 and zero units of X2. a) A) Find a trade that the two can make that makes Bob neither better off nor worse off, but that maximizes Alice's utility. Show/explain how you find this. b) Draw and fully label and Edgeworth box, indicating the dimensions of the box in each direction, the endowment point, and the consumption point (after trade). Draw at least one indifference curve for Bob (through the endowment point), and at least two indifference curves for Alice (indicating her level of utility at the endowment point, and after the trade).
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