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ECOS2001 Tutorial 6
1
ECOS 2001 Tutorial 6
1. Morris Zapp and Philip Swallow consume wine and books. Morris has an
initial endowment 0f 60 books and 10 bottles of wine. Phillip has an initial
endowment of 20 books and 30 bottles of wine. They have no other assets and
make no trades with anyone other than each other. For Morris, a book and a
bottle of wine are perfect substitutes. His utility function is U(b,w)=b+w, where b
is the number of books he consumes and w is the number of bottles of wine he
consumes. Phillip’s has a CobbDouglas function, U(b,w) = bw.
(1) Draw the Edgeworth Box in which Morris’s consumption is measured from
the lower left and Phillip’s is measured from the upper right corner of the box.
(2) Mark the initial endowment and label it E. Draw Morris’s indifference curve
that passes through his initial endowment. Similarly, draw Philip’s indifference
curve that passes through his initial endowment.
(3) At the Pareto optimum, where both consume some of each good, it must be
that their marginal rates of substitution are equal. No matter what he consumes,
Morris’s marginal rate of substitution is equal to ____________ . When Philip
consumes the bundle
()
Pp
b ,w
, his MRS is _____________. Therefore, every
Pareto optimal allocation where both consume positive amounts of both goods
satisfies the equation _________________. Draw the locus of Pareto optimal
allocations.
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