MarioandPeterconsumewhiskeyandbell peppers.Mariohas an initial endowment of 80bell peppersand 20 bottles ofwhiskey.Peterhas an initial endowment of 40bell peppersand 50 bottles ofwhiskey. They have no other assets and make no trades with anyone other than each other. ForMario, abell pepperand a bottle ofwhiskeyare perfect substitutes. His utility function is

(,)=+

u(b,w)=b+w,

where

bis the number ofbell peppershe consumes and

wis the number of bottles ofwhiskeyhe consumes.Peterhas a Cobb-Douglas utility function:

(,)=

u(b,w)=bw.

For graphing purposes, placebell pepperson the horizontal axis, and placewhiskeyon the vertical axis.

At any Pareto optimum, where both people consume some of each good, it must be that their marginal rates of substitution are equal. No matter what he consumes,Mario's marginal rate of substitution (in absolute value) is equal to.

WhenPeterconsumes the bundle(,)

, his MRS (in absolute value) is.

Choose one:

A.false

B.true

Every Pareto optimal allocation where bothPeterandMarioconsume positive amounts of both goods satisfies the equation

wp/bp=?

At a competitive equilibrium,Mariowill have to consume somebell peppersand somewhiskey. But for him to do so, it must be that the ratio of the price ofwhiskeyto the price ofbell peppersis. Therefore, we know that if we makebell peppersthe numeraire, the price ofwhiskeyin competitive equilibrium must be.

At the equilibrium prices you found in Part 2 of this question, the value ofPeter's initial endowment is.

At these prices,Peterwill choose to consumebell peppersandbottles ofwhiskey. IfMarioconsumes all of thebell peppersand all of thewhiskeythatPeterdoesn't consume, he will consumebell peppersandbottles ofwhiskey.

At the competitive equilibrium prices that you found,Mario's income is. Therefore at these prices, the cost toMarioof consuming all of thebell peppersand all of thewhiskeythatPeterdoesn't consume is

his income. At these prices, canMarioaord a bundle that he likes better than the bundle consisting of all of thebell peppersand all of thewhiskeythatPeterdoesn't consume?

Choose one:

A.yes

B.no