Please see attached Consider an exchange economy with two consumers, Jack and Blue, who trade only two goods:Cookies and Hats. Quantities of Cookies are measured vertically, and quantities of Hats aremeasured horizontally. Jacks origin should be placed at the bottom left.a.1. Draw an Edgeworth box diagram in which the two consumers can exchange the two goods.Show at least three indifference curves for each consumer. These curves shouldbe well spread across the Edgeworth box. Label and briefly explain theIndifference curves and origins for Jack and Blueb. On a copy of your diagram, show and label the contract curve. By referring tothe concept of Pareto efficiency, explain its economic significance. Also showand explain the core of this exchange economy.

Pareto optimality is a concept in economics that refers to a state where it is not possible to…

Answered: Consider an exchange economy with two…

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Theory Of Consumer Choice

Section: Chapter Questions

Problem 1PA

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Consider an exchange economy with two consumers, Jack and Blue, who trade only two goods:
Cookies and Hats. Quantities of Cookies are measured vertically, and quantities of Hats are
measured horizontally. Jacks origin should be placed at the bottom left.
a.
1. Draw an Edgeworth box diagram in which the two consumers can exchange the two goods.
Show at least three indifference curves for each consumer. These curves should
be well spread across the Edgeworth box. Label and briefly explain the
Indifference curves and origins for Jack and Blue
b. On a copy of your diagram, show and label the contract curve. By referring to
the concept of Pareto efficiency, explain its economic significance. Also show
and explain the core of this exchange economy.

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1.
Using a new box diagram for Jack and Blue, mark a possible initial endowment point and, with the help of a budget constraint line and indifference curves, show an excess demand for Hats at a given price and explain the economic significance of excess demand. Label your diagram in full.

2.
Reproduce the diagram you used for Q2 and explain what must happen to the price of Hats relative to the price of Cookies for equilibrium to be established, eliminating the excess demand for Hats. Show this on your diagram and explain the adjustment process and equilibrium outcome in full.
3.
Discuss in full the implications for efficiency and fairness of the First Welfare Theorem and the Second Welfare Theorem

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