Marginal rates of substitution of bread for cheese

Reference no: EM13493557

Consider a simple economy with two individuals, John and Marsha. The economy is endowed with 30 kilograms of cheese and 30 loaves of bread each month. John and Marsha's preferences for bread and cheese are given by their marginal rates of substitution of bread for cheese:

MRSJbc = 10
xJb

MRSMbc = 5
xMb

where xJb is the quantity of bread consumed by John and xMb
is the quantity of bread consumed by Marsha.

a. If each individual only had one loaf of bread, how much cheese would each individual be willing to give up in order to have another loaf of bread.
b. In the initial allocation, each individual has 15 kilograms of cheese and 15 loaves of bread. Draw the Edgeworth Box diagram for this economy and explain whether the initial allocation of cheese is Pareto efficient.
c. Draw the contract curve for this economy where the MRSs are equal.

Reference no: EM13493557

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