For the rest of this question consider a two goods economy where Kim and Jung can trade Ferraris (good x) and VR headsets (good y) with each other. Kim and Jung both enjoy driving Ferraris and having more VR headsets (so more friends can play the same game). They start at the same (high) level of income. Kim has an initial endowment of (x0k, y0k) = (10,30) and Jung has an initial endowment of (x0j, y0j) = (30,10) a) Illustrate the initial endowment in an Edgeworth box. Clearly label the axes and explain the dimensions of the box. Show the indifference curve each of them is on at the endowment point. b) Consider an allocation where Kim gets (xk, yk) = (40,40) and Jung gets the remaining Ferraris and VR headsets. Show where this point is in the Edgeworth box. Is this allocation Pareto efficient? Is it equitable? How likely is this to arise in practice?
For the rest of this question consider a two goods economy where Kim and Jung
can trade Ferraris (good x) and VR headsets (good y) with each other. Kim and
Jung both enjoy driving Ferraris and having more VR headsets (so more friends
can play the same game).
They start at the same (high) level of income. Kim has an initial endowment of (x0k, y0k) = (10,30) and Jung has an initial endowment of (x0j, y0j) = (30,10)
a) Illustrate the initial endowment in an Edgeworth box. Clearly label the axes and
explain the dimensions of the box. Show the indifference curve each of them is
on at the endowment point.
b) Consider an allocation where Kim gets (xk, yk) = (40,40) and Jung gets the
remaining Ferraris and VR headsets. Show where this point is in the Edgeworth
box. Is this
in practice?
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