Question

Please give a detailed explanation. I have the answer. Suppose two coffee snobs who must have their coffee and cream in exact proportions (each cup is 10 coffee per 1 unit cream) are invited to a weekend long event (during which they can easily consume 8 cups of coffee). Suppose Snob A is given 8 units of cream and Snob B is given 80 units of coffee. The contract curve in the Edgeworth box would be

a. a right angle connecting the lower left corner with the upper right corner. b. a curve (not a line) connecting the lower left corner with the upper right corner. c. a line connecting the lower left corner with the upper right corner. d. a right angle connecting the upper left corner with the lower right corner.

Answer 1

Answer is option c)

Let Coffee : X, cream : Y

X Endowment = 80, Y Endowment = 8

Utility functions are of Perfect Complements type, bcoz two goods are consumed in a fixed proportion

U(X,Y) = Min { X, 10Y }

So at eqm, X = 10Y

Thus contract Curve is locus of pareto effecient Allocations

In case of Perfect Complements, contract curve is line , along which IC are kinked

contract curve : X = 10Y

.

Edgeworth box diagram

Dimensions : 80×8