Economic

 

Shelly and Ron are roommates. Their apartment has a fixed monthly rent, and a small water heater. Draw an Edgeworth box with rent on the horizontal axes and hot water on the vertical axes. It is efficient to split both the rent and the hot water equally. Draw this point on your Edgeworth box, and an indifference curve for both Shelly and Ron that goes through it. Ron is upset, because currently they are splitting rent equally, but Shelly is using all the hot water. He claims that there is a Pareto improvement from this allocation. Draw this allocation (shared rent, Shelly has all the hot water) on a new Edgeworth box and draw two reasonable indifference curves representing their utility at this point. Indicate the allocations that are Pareto improvements from this allocation.