Question: 4. [15 marks] Avi (A) and Brad (B) live in an exchange economy where they consume cakes, x, and litres of beer, y. Their

4. [15 marks] Avi (A) and Brad (B) live in an exchange

4. [15 marks] Avi (A) and Brad (B) live in an exchange economy where they consume cakes, x, and litres of beer, y. Their preferences are given by: u = xy There are a total of 90 cakes and 64 litres of beer in the economy. Assume that Avi and Brad are each endowed with 32 litres of beer, that Avi is endowed with 60 cakes and Brad is endowed with 30 cakes. Find the equilibrium price of a cake (px) assuming that the price of a litre of beer is set to 1 (py = 1). (Hint: this may not be a nice round number). Draw the before and after-trade situation in an Edgeworth Box diagram, and explain how many cakes and litres of beer are traded between Avi and Brad.

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