Question 3 [14 points]

In a small exchange economy with two goods (x, y), there are only two agents: A and B. Their endowments are given by (eAx , eAy ) = (8,2) and (eBx ,eBy ) = (2,8).

1. Draw the Edgeworth box for this economy and label clearly the endowment bundle. Also, draw the indifference curve that passes through this bundle, one for each agent. (You can assume that the indifference curves are "Cobb-Douglas" shaped.) [5 points]
2. On the same graph, shade the set of bundles that are Pareto improvements to both agents. [1 point]
3. Assume that their demand functions are given by: