191hw6-10 - Econ 191 Spring 2010 Francis Lui Problem Set 6...

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1 Econ 191 Spring 2010 Francis Lui Problem Set 6 Due Date: Thursday, May 13, 2010, 2:50 pm. (This is a challenging homework.) (Consumption externality.) Ada and Bill are two students having utility functions that depend on y = music/quietness, and x = all other goods. Ada likes all her music played loud, but Bill likes quietness. They live in adjacent dorm rooms. Thus, if Ada listens to y* hours of music, then Bill will get 12 - y* hours of quietness. Suppose that Ada and Bill are each endowed with, say, 10 units of all other goods. Further assume that the rule at the dorm is such that Ada is not allowed to produce any noise unless she has got the permission from Bill. In other words, Bill is endowed with 12 hours of quietness, while Ada is endowed with zero hours of music time. Construct an Edgeworth Box that represents the above assumptions. You may regard that the vertical axis measures noise (music) and the horizontal axis stands for other goods. Now assume that both of them have “parallel” preferences, in the sense that there
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191hw6-10 - Econ 191 Spring 2010 Francis Lui Problem Set 6...

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