1. General Equilibrium: a. Suppose that Eliza and Alexander are currently at point A. How many servings of tea and scones does each person have? (Note: Alexander's indifference curve is pink while Eliza's indifference curve is black). b. Suppose that Eliza leaves the room and that Alexander takes 4 cups of tea from her and leaves her 2 of his scones. Illustrate this reallocation in the Edgeworth Box diagram (label this point B). Is this a Pareto improvement? c. Show that a reallocation where Alexander takes 4 cups of tea and leaves Eliza only 1 scone is not a Pareto improvement. Label this new allocation point C. Alexander's Scones

1. General Equilibrium: a. Suppose that Eliza and Alexander are currently at point A. How many servings of tea and scones does each person have? (Note: Alexander's indifference curve is pink while Eliza's indifference curve is black). b. Suppose that Eliza leaves the room and that Alexander takes 4 cups of tea from her and leaves her 2 of his scones. Illustrate this reallocation in the Edgeworth Box diagram (label this point B). Is this a Pareto improvement? c. Show that a reallocation where Alexander takes 4 cups of tea and leaves Eliza only 1 scone is not a Pareto improvement. Label this new allocation point C. Alexander's Scones

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.9P

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Bottles of water sell for 1 euro and slices of chocolate cake sells for 5 euros. Suppose Jack, whose preferences satisfy all of the basic assumptions of consumer choice theory, buys 5 bottles of water and one slice of chocolate cake every day. At this consumption bundle, his MRS of bottles of water for slices of chocolate cake is 3 (i.e. he is willing to give up 3 bottles of water to get an additional slice of cake). Which of the following is true? (Hint: draw this situation with bottles of water on the vertical axis and slices of cake on the horizontal axis). Jack could not increase his utility because it is already at a maximum level. Jack could increase his utility by buying more bottles of water and less chocolate cake. Jack could increase his utility by buying more bottles of water and more chocolate cake. Jack could increase his utility by buying fewer bottles of water and more slices of cake.
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