Two individuals, Catherine and Annabelle, wish to make exchanges. Catherine has three pencils and Annabelle also has three.

Catherine values successive units of pencil as follows: $6, $5, $4, $3, $2, $1, then $0 for any additional unit.

Annabelle values successive units of pencil as follows: $4, $3.5, $2.5, $2, $1, then $0 for any additional unit.

Questions:

1) What is Catherine or Annabelle's decision rule for selling pencils?

2) If Catherine and Annabelle make an exchange, who will be the buyer, who will be the seller? Justify your answer.

3)How many units will Catherine and Annabelle have after the exchange?

4)Is this allocation effective? Justify your answer.

5)What prices are compatible with the mutually achieved exchange

6)Explain how gains from exchange are determined.

7)Calculate the value (in $) of the exchange gains obtained.