Question

Aline and Bogdan are two friends at Georgetown. They like to have curry and rice parties since both like these goods and are endowed with different quantities of it. Aline has perfect complements preferences for curry c and rice r, represented by the utility function uA(cA,rA) = min{cA,rA} while Bodgan has Cobb- Douglas preferences uB (cB , rB ) = 12 ln(cB ) + 12 ln(rB ).

Every month, Aline’s mom ships her the ingredients for one cup of rice and 6 cups of curry, (ωcA,ωrA)=(6,1), while Bogdan is shipped 5 cups of rice, (ωcB,ωrB)=(0,5).

1. (1 point) Draw the Edgeworth box for these friends’ exchange economy and find the area of allocations that Pareto Dominate the endowment.

2. (2 points) Obtain the equation of the contract curve in this exchange economy.

3. (2 points) Party time comes and Aline and Bogdan sit down to share their meals. Allow rice to be the numeraire in the economy (pr = 1). Find how many curry cups will be traded for each cup of rice (pc) in equilibrium and how many pairs of rice and curry will be consumed by each friend.

Answer 1