Question

Bert has an initial endowment consisting 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. 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.(Draw all lines and curves on the same table and number the intercepts).

a. Draw the indifference curve of Bert that goes through his initial endowment.

b. Draw the indifference curve of Ernie that goes through his initial endowment.

c. Describe the set of allocations that are Pareto preferred to the initial allocation.

d. Plot the contract curve.

Answer 1