2350pqset_7 - ECON2350 V.BARDIS PRACTICE SET 7 1 Tom and...

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ECON2350 – V.B ARDIS P RACTICE S ET 7 1. Tom and Jerry find themselves stranded on an island. Each person is interested in consuming the same two goods, X and Y. Tom has 3 units of good X, and 1 unit of good Y. Jerry has 2 unit of good X and 5 units of good Y. Tom and Jerry have identical preferences given by Ut=XtYt 2 for Tom and Uj=XjYj 2 for Jerry. (a) Do Tom and Jerry have an incentive to trade with each other? (b) Derive the set of all efficient allocations in this economy and represent them graphically (i.e., find and draw the ‘contract curve’). (c) What will be the equilibrium relative price of good X if it is determined under perfectly competitive conditions? (d) Show that the allocation is efficient. 2. Consider a single-person economy inhabited by Jerry. Jerry can produce two goods, X and Y, using his labour. He has L=8 units labour. If he devotes Lx units in the production of good X, he will get X=Lx 1/2 units of this good.
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