Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Initially, Michael has 10 pizzas (Z), and 4 colas (C), and Tony has 4 pizzas and 10 colas. After a trade with Tony, Michael has

Initially, Michael has 10 pizzas (Z), and 4 colas (C), and Tony has 4 pizzas and 10 colas. After a trade with Tony, Michael has 9 pizzas and 5 colas.

(a) In a properly labeled Edgeworth Box, label the initial allocation A and the new allocation B. Draw some indifference curves that are consistent with this trade

(b) Suppose Michael's utility function is given by

U(M) = Z + C and Tony's by U(T) = Z^0.5 x C^0.5.

What is MRS(ZC) for each of them?

(c) Is the trade described in the question consistent with Michael and Tony's preferences given in (b)? If so, is that allocation Pareto efficient?

(d) What does the price ratio Pz/Pc have to be equal to for Michael and Tony to trade to a Pareto efficient allocation? What allocation will they trade to?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Capitalist Political Economy Thinkers And Theories

Authors: Heather Whiteside

1st Edition

0429888031, 9780429888038

More Books

Students also viewed these Economics questions

Question

=+b) What were the factors and factor levels?

Answered: 1 week ago

Question

1. Information that is currently accessible (recognition).

Answered: 1 week ago