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Shomu Banerjee
ECON 201
EXCHANGE ANSWERS
O
b
O
a
x
a
y
a
x
b
y
b
ω
E
Good
x
is bars of chocolate (assumed to be divisible) and good
y
is hours spent
on computer games. Adam (person 1) has 4 bars of chocolate but doesn’t have a
computer; Billy (person 2) is allowed by his parents to spend 5 hours on the
computer but has no chocolate. Their utility functions are
u
a
(
x
a
,
y
a
)
=
x
a
+
2
y
a
and
u
b
(
x
b
,
y
b
)
=
x
b
+
y
b
with marginal utilities for Adam being
MU
x
a
=
1
and
MU
y
a
=
1
y
a
and for Billy being
MU
x
b
=
1
and
MU
y
b
=
1
2
b
.
(a)
Find the points of the contract curve that lie within the Edgeworth box.
The points of the contract curve that lie within the Edgeworth box are found by
setting the marginal rate of substitution for one person equal to that of the other.
The marginal rates of substitution for Adam and Billy are
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View Full Document MRS
a
=
y
a
and
MRS
b
=
2
b
.
Setting them equal, we get
a
=
2
y
b
or
y
a
=
4
y
b
.
Since
y
a
+
y
b
=
5
, substitute for
y
b
= 5 –
y
a
and solve to get
y
a
= 4 and
y
b
= 1. Since
these quantities do not depend on
x
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This note was uploaded on 10/26/2010 for the course ECONOMICS ECON 201 taught by Professor Dr.shomubanerjee during the Summer '07 term at Emory.
 Summer '07
 Dr.ShomuBanerjee
 Microeconomics

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