3. Consider a simple two-person exchange economy consisting of two guys named Skinny Pete and Badger,...
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3. Consider a simple two-person exchange economy consisting of two guys named Skinny Pete and Badger, and two goods, beer and magazines. Currently, Skinny Pete consumes 2 magazines and 6 six-packs of beer; Badger consumes 8 magazines and 2 six- packs of beer. (There are 10 magazines and 8 six-packs of beer available to divide between the two.) Illustrate the situation with an Edgeworth box. Put magazines on the x- axis and beer on the y-axis. Call the current allocation A. Recall from intermediate micro, that MRSy = MU/MU, where MU equals marginal utility. At the current allocation, Skinny Pete's marginal rate of substitution between beer and magazines is 2 (MRSmi=2=MUmagazines /MUreer). (Hint: This means that at the current allocation, Skinny Pete will give up 2 six-packs of beer for one magazine.) Badger's marginal rate of substitution between beer and magazines is 1/3 (MRSmb"=1/3=MUmagazines"/ MUbeer). Is this allocation Pareto efficient? If so, explain why. If not, showa possible Pareto improvement. 3. Consider a simple two-person exchange economy consisting of two guys named Skinny Pete and Badger, and two goods, beer and magazines. Currently, Skinny Pete consumes 2 magazines and 6 six-packs of beer; Badger consumes 8 magazines and 2 six- packs of beer. (There are 10 magazines and 8 six-packs of beer available to divide between the two.) Illustrate the situation with an Edgeworth box. Put magazines on the x- axis and beer on the y-axis. Call the current allocation A. Recall from intermediate micro, that MRSy = MU/MU, where MU equals marginal utility. At the current allocation, Skinny Pete's marginal rate of substitution between beer and magazines is 2 (MRSmi=2=MUmagazines /MUreer). (Hint: This means that at the current allocation, Skinny Pete will give up 2 six-packs of beer for one magazine.) Badger's marginal rate of substitution between beer and magazines is 1/3 (MRSmb"=1/3=MUmagazines"/ MUbeer). Is this allocation Pareto efficient? If so, explain why. If not, showa possible Pareto improvement.
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