1 Edgeworth Box Corners Peters and Walters are prisoners. Peters received a ship
ID: 1131828 • Letter: 1
Question
1 Edgeworth Box Corners Peters and Walters are prisoners. Peters received a shipment containing only chocolates, whereas Walters received a shipment containing only cigarettes 1. Which point on the Edgeworth box below represents the endowment? 2. Suppose Peters is a nonsmoker and Walters is allergic to chocolate. What would the contract curve look like in this case? Walters chocolate Peters cigarettes Figure 1: Edgeworth Box Corners 2 Apples and Bananas Suppose that Anna considers one apple to trade off for three bananas. Bob considers an apple to trade off for four bananas. 1. Are Anna and Bob on the contract curve? 2. If Anna gives Bob an apple in exchange for 3 bananas, who is better off? 3. If Anna gives Bob an apple in exchange for 3.5 bananas, who is better off?Explanation / Answer
Answer 1
1)
At point X Walter will have 0 Chocolates and Peter will have 0 cigarettes, which is exactly our endowment. In short we have to determine that point where Walter have 0 chocolates and Peter will have 0 cigarettes and on the edgeworthbox that point is X.
Hence Point X represents Endowment.
2) There is only one point that is pareto optimal i.e. X because Take any point inside or on the box we can make both better off by giving Peter all the chocolates and Walter all the Cigarettes. Hence Contract curve i.e. set of all pareto optimal points is just 1 point i.e. POINT X. Which is the endowment only
Hence Contract Curve is just one point, Point X.
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