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Question: Consider a 2-person/2-good exchange economy in which person 1 is endowed with 5 units of the goods x1 and x2 and person 2 is also endowed with 5 units of the goods x1 and x2. Suppose that person 1's taste is perfect complement and person 2's taste is perfect substitute.
Required:
1. Draw the Edgeworth box for this case and indicate where the endowment point E lies.
2. Draw the indifferent curves for both persons through the endowment point E. Is the endowment allocation efficient?
3. Could the endowment point E be supported as a competitive equilibrium allocation? What is the equilibrium price through this point E?
4. Draw the contract curve, i.e., the set of all efficient allocations.
5. Pick another efficient allocation and demonstrate a possible way to reallocate the endowment among us such that the new efficient allocation becomes an equilibrium allocation supported by an equilibrium price.
6. Please state the second welfare theorem.
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