Candice and Dominica are engaged in exchange over two goods: boxes of pens () and boxes of paper (). They both have inequality averse preferences as defined by the following equation. [(, ), (, )] = [ , 0] [ , 0] We assume that and are identical for Candice and Dominica. In this interaction, the two players each treats themselves as player and their co-participant as player . The two players have the following initial endowments. Candice has 16 boxes of pens and 4 of paper. Dominica has 4 of boxes pens and 46 of paper. a. Graph the Edgeworth box for the exchange between Candice and Dominica when they each have utilities that are Cobb-Douglas and take the following form: Candice knows Dominica's utility takes this form, and vice versa. They use this information when constructing their functions. Derive the equation of the contract curve.bWhat would happen if increased? Explain by referring to your Edgeworth box. It is useful to think about what happens to marginal utility with changes in the consumption of pens and paper when changes. Show transcribed image text

1 1 2,2 Ui = x+y; x Yi 1 1 2,2 Ui = x+y; x Yi