Consider an economy with 3 people: Thomas (T), Pan (P) and Oliver (O). There are

three periods in this economy: morning, afternoon and evening (denoted periods 1,2,3). Each

individual receives an endowment y and likes to consume during two periods. Good y is not

storable and is perishable, meaning it cannot be saved from one period to another. Each

individual receives the endowment y at different periods. The preferences and endowments

of each person are given by:

UT = c2 + c3 and (y1; y2; y3) = (0; y; 0)

UP = c3 + c1 and (y1; y2; y3) = (0; 0; y)

UO = c1 + c2 and (y1; y2; y3) = (y; 0; 0)

For example, Thomas likes to consume in the afternoon and evening and has an endowment only in the afternoon.

(i) Show that each person consumes his/her endowment and there are no gains from trade

in this economy [3 marks]

(ii) Introduce a medium of exchange in this economy. You can call it money. Assume that

only one person can receive all the monetary units once the economy is created. Who should receive it? Describe the pattern of trade in this monetary economy. [4 marks]

(iii) Other than a monetary economy, can you think of another mechanism that allows these

individuals to trade, and make everyone better off as a result? [3 marks]