Y5

Ben and Jerry are a pair of kids that appreciate the finer things in life: chocolate chips () and bubble gum (). Ben's utility function over chocolate chips and bubble gum is (, ) = and Jerry's is (, ) = 2. Ben has an initial endowment of 8 chocolate chips and 1 piece of bubble gum, Jerry's initial endowment is 2 chocolate chips and 3 pieces of bubble gum. They are unable to make trades with anyone else. a. [8] Normalize the price of bubble-gum and solve for the competitive allocation. b. [3] Suppose that Ben and Jerry know how much of each good they would get to consume at the competitive allocation. In the absence of prices, would they voluntarily agree to this allocation given their initial endowments? Explain