Joe and Martin, two roommates, have access to music in digital and analog formats. Each are initially endowed with 8 GB of high-resolution digital music and 4 vinyl LP's (analog) per month (there are a total of 16 GB's of music in digital and 8LP's in this case). Joe's preferences for music in digital and analog formats are represented by the utility function u, (D, A) = 2D + 2A, where D is the amount of digital music in GB's and A is the numberofLP's. Martin's utility function is um(D,A)=D+4A. 1. Draw an Edgeworth box to show the initial endowments and the indifference curves (going through the initial endowments) for Joe and Martin. What are their utility levels from the initial endowments? 2. Calculate the marginal rates of substitution for Joe and Martin. Provide an economic interpretation. 3. Do the initial endowments represent a Pareto efficient allocation? Discuss.

Joe and Martin, two roommates, have access to music in digital and analog formats. Each are initially endowed with 8 GB of high-resolution digital music and 4 vinyl LP's (analog) per month (there are a total of 16 GB's of music in digital and 8LP's in this case). Joe's preferences for music in digital and analog formats are represented by the utility function u, (D, A) = 2D + 2A, where D is the amount of digital music in GB's and A is the numberofLP's. Martin's utility function is um(D,A)=D+4A. 1. Draw an Edgeworth box to show the initial endowments and the indifference curves (going through the initial endowments) for Joe and Martin. What are their utility levels from the initial endowments? 2. Calculate the marginal rates of substitution for Joe and Martin. Provide an economic interpretation. 3. Do the initial endowments represent a Pareto efficient allocation? Discuss.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter4: Utility Maximization And Choice

Section: Chapter Questions

Problem 4.11P

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