Reference no: EM13153148
Aisha and Robin consume only food and clothing. Figure 1 below depicts the consumption possibilities for these two consumers.
Point X is the endowment point showing an initial distribution of food and clothing between the consumers.
Point P shows a budget constraint reflecting the price of food in terms of clothing.
UA and UR are indifference curves for Aisha and Robin respectively.
Figure 1: Consumption possibilities, indifference maps and budget constraint for Aisha and Robin
Based on Figure 1, say:
What do points A and B identify in terms of consumption for each person?
Why is neither point A nor B on the contract curve?
Which good is in excess demand? Explain your answer.
Draw a box diagram, based on Figure 1, to show how the price of food relative to clothing must change to bring about a Pareto optimal equilibrium.
Draw a separate box diagram to show what the contract curve might look like if Aisha was concerned about very low consumption of food and clothing by Robin, but Robin was only concerned about his own consumption.
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