Question
Tom and Jerry enjoy eating steak and ribs. Their utilityfunctions for steak and ribs are given by the following:U Tom = 2S 0.8 R 0.2
Tom and Jerry enjoy eating steak and ribs. Their utilityfunctions for steak and ribs are given by the following:UTom = 2S0.8R0.2,UJerry = 6S0.4R0.6. Tom has 10steaks and 5 racks of ribs while Jerry has 4 steaks and 18 racks ofribs.
a.Provide a function describing how many racks of ribs eachconsumer is willing to trade for one more steak (i.e., theirmarginal rates of substitution of ribs for steak).
b. What are Tom and Jerry’s marginal rates of substitution attheir endowment points?
c. Do any Pareto improving trades exist for Tom and Jerry? Ifso, who will sell steak and in what range will the price of steak(in terms of ribs) lie?
d. Give an equation for the contract curve from Tom’sperspective (RF as a function of SF).
e. Draw an Edgeworth box showing the initial endowment (labelede), the indifference curves through the endowment point, and thecontract curve. Indicate the core of this exchange economy on yourgraph.
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