Suppose a stranded island is discovered by two best friends: Dante and Joan. Excitedly they run to
Question:
Suppose a stranded island is discovered by two best friends: Dante and Joan. Excitedly they run to their yacht to tell everyone but they find their only mode of transportation has spontaneously combusted, exploded and now is a smoldering heap of useless rubble. They quickly realize the situation is dire and hurry to collect any resource they could find. Unfortunately for them this island is barren with only two resources that are of any use: oranges and coconuts. After a quick plundering session, they each end up with the following endowments: Dante has 80 oranges and 50 coconuts, while Joan gathered 20 oranges and 100 coconuts.
A) (5 Points) With survival on the line suppose they both decide to act selfishly and would trade only if there is a resulting gain in utility. Create and Edgeworth’s Box using the information given. Highlight the initial endowment for each shipwrecked sailor. Create a contract line and show the equation of that line (in general terms, no calculations needed). Lastly, given that their indifference curves are not tangent at the initial endowment show the how to find the Pareto efficient core using your contract line.
B) (5 Points) Use the box you created in A). Suppose for some reason the decided to respect the pricing structure they had back home. They decide to use rocks to represent dollars and decide to trade based on prices they remember from the grocery store. Being price takers, they remember that the price of an orange was 2$ and the price of a coconut was 6$. Use any method to derive the price line in the Edgeworth’s box. Meaning, find and graph the line of all possible trades given their initial endowment and given prices.
Principles of Supply Chain Management A Balanced Approach
ISBN: 978-1337406499
5th edition
Authors: Joel D. Wisner, Keah Choon Tan, G. Keong Leong