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

  • CreatedMarch 25, 2015
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