Smith and Jones are stranded on a desert island. Each has in her possession some

Question

Smith and Jones are stranded on a desert island. Each has in her possession some slices of ham (H) and cheese(c). Smith prefers to consume ham and cheese in fixed portions of 2 slices of cheese to each slice of ham. Her utility is given by Us= Min (10H, 5C). Jones on the other hand regards ham and cheese as perfect substitutes-she is always willing to trade 3 slices of ham for 4 slices of cheese, and her utility function is given by Uj=4h+3c. Total endowments are 100 slices of ham and 200 slices of cheese.

e. Suppose that Smith expects the ham transfer from Jones and, through carelesness, allows 20 slices of her initial ham endowment to spoil. Assuming the transfer from jones actually happens, now what mutually beneficial trades are possible, and what are the potential utility levels for smith and jones.

Explanation / Answer

you might find your answer here:
http://www.stanford.edu/~jay/micro_class/lecture14.pdf

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