Suppose there are two consumers, A and B. The utility functions of each consumer are given by:
UA(X,Y) = X *Y
UB(X,Y) = X + 2Y
The initial endowments are:
A: X = 2; Y = 6
B: X = 2; Y = 2
a) Using an Edgeworth Box, graph the initial allocation and draw the indifference curve for each consumer that runs through the initial allocation. Be sure to label your graph carefully and accurately.
b) What is the marginal rate of substitution for consumer A at the initial allocation?
c) What is the marginal rate of substitution for consumer B at the initial allocation?
d) Is the initial allocation Pareto Efficient? If so, simply say “It is Pareto Efficient”. If not, propose a trade between the two consumers that would make them both better off. Be specific.