Question
Two consumers, Rick and Donald, together own 5 action figures (good x) and 25 comic books (good y). Let xR and xD denote the number
Two consumers, Rick and Donald, together own 5 action figures (good x) and 25 comic books (good y). Let xR and xD denote the number of action figures Rick and Donald have, respectively, and yR and yD the number of comic books Rick and Donald have. Suppose that the utility functions of Rick and Donald are given by: UR =xy with MUx = y, MUy= x. UD=xy^2 with MUx=y^2, MUy=2xy. Suppose that the current allocation is xR = 1 yR = 21, xD = 4, yD = 4. a) Is the current allocation exchange efficient? b) Can you identify one trade (one shift of goods) that would generate a Pareto Improvement (making one player better off without hurting the other)? c) Evaluate the social welfare in your current allocation and the initial allocation using the three social welfare functions we discussed in class.
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