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Question 3. The neighboring island of Boingo is very similar to that of Drongo, except that there are My old people and My young people; their endowments and utilities are the same as for the old and young in Drongo in parts 2a-2c. We first consider the case of no trade between islands. (a) What is the equilibrium price of period-1 cake in Boingo? Suppose now that a Polynesian invents an outrigger that permits costless trade between Boingo and Drongo. Suppose No/Ny # Mo/My. (b) Since costless trade between islands is possible, are the pre-trade competitive allocations in Boingo and Drongo Pareto efficient? (c) What is the competitive price and allocation, now that costless trade is possible? (d) Who is made worse off by the opening of trade? Reconcile this with the statement that com- petitive allocations are Pareto efficient. (e) Suppose Boingo and Drongo formed a new island nation. Suppose the government of the Boingo-Drongo Federation has the right to reallocate ownership of the endowments of period- 0 and period-1 cake on each island, as long as the ownership stays on that island. Is it pos- sible to reallocate ownership so that everyone prefers trade with the reallocated endow- ments to the original no-trade situation (with the original endowments)? Does your answer change if ownership need not stay on the same island as the original endowment? land. Each member of the old generation has an endowment of 1 pound of period-0 cake and no period-1 cake. Each member of the young generation has an endowment of 1 pound of period-1 cake and no period-0 cake. There are N. old people and Ny young people. The consumption bundles are the pairs (Co. C)), where co is cake in period 0 and c, is cake in period 1. All genera- tions, old and young, have identical utility functions U(co. C) = log co + 6 log cy