Suppose that Hannahs utility function is U H = 3T + 4C and that Joses utility function

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Suppose that Hannah’s utility function is UH = 3T + 4C and that Jose’s utility function is UJ = 4T + 3C, where T is kilograms of tea and C is kilograms of coffee per year. Suppose there are fixed amounts of 28 kilograms of coffee per year and 21 kilograms of tea per year. Suppose also that the initial allocation is 15 kilograms of coffee to Hannah (leaving 13 kilograms to Jose) and 10 kilograms of tea to Hannah (leaving 11 kilograms of tea to Jose).
a. What do the utility functions say about the marginal rate of substitution of coffee for tea?
b. Draw the Edgeworth Box showing the indifference curves and the initial allocation.
c. Draw the contract curve on the Edgeworth Box. Explain why it looks different from the contract curve depicted in the text.
d. Is the initial allocation of coffee and tea Pareto efficient?

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Public Finance In Canada

ISBN: 9781259030772

5th Canadian Edition

Authors: Harvey S. Rosen, Ted Gayer, Jean-Francois Wen, Tracy Snoddon

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