General equilibrium-contract curve for initial allocation

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General Equilibrium

1. Bert has an initial endowment of 10 units of food and 10 units of clothing. Ernie’s initial endowment consists of 10 units of food and 20 units of clothing. Represent these initial endowments in an Edge worth Box.

2. Bert regards food and clothing as perfect 1-for-1 substitutes. Ernie regards them as perfect complements, always wanting to consume 3 units of clothing for every 2 units of food.

a. Describe the set of allocations that are Pareto preferred to the one given in Problem 1.

b. Describe the contract curve for the initial allocation.

c. What relative price will be required to sustain an allocation on the contract curve?

3. How will your answers to Problem 2 differ if 5 units of Ernie’s clothing endowment are given to Bert?

**Please explain in detail how you determined the answer. I would like to be able to follow the reasoning begin the response.

Reference no: EM13897036

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