Quiz 10 Exchange Ans

# Quiz 10 Exchange Ans - Shomu Banerjee ECON 201 ya xb EXCHANGE ANSWERS Ob E Oa xa yb Good x is bars of chocolate(assumed to be divisible and good y

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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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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.

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Quiz 10 Exchange Ans - Shomu Banerjee ECON 201 ya xb EXCHANGE ANSWERS Ob E Oa xa yb Good x is bars of chocolate(assumed to be divisible and good y

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