Consider an exchange economy with two people (Ali, and Burcu) and two goods (apples, and bananas). Ali and Burcu have the following utility functions:uA = xA . yA (xA is Ali’s consumption of apples, and yA is his consumption of bananas)uB = 2xB + yB (xB is Burcu’s consumption of apples, and yB is her consumption of bananas)Ali’s initial endowment is 4 apples and 4 bananas and Burcu’s initial endowment is also 4 apples and 4 bananas.a. Draw the representation of the economy in an Edgeworth box. Put Ali on the bottom left corner, and Burcu to the top right corner. Apples are measured on the horizontal axes, and bananas on the vertical axes. Draw the indifference curves through the initial endowment. Which allocations Pareto dominate the initial endowment? Show them on the Edgeworth box.b. Solve for the Pareto Optimal Allocations. Draw them on the Edgeworth box. Show the Contract Curve. Find the competitive equilibrium allocation, that is, equilibrium prices (you can normalize the prices, e.g., price of apple = p and price of banana is 1), and equilibrium allocations.

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a Edgeworth Box and Indifference Curves Lets denote the initial endowment for Ali as xA yA and for B... View the full answer