Reference no: EM132488559

General Equilibrium: Efficiency in the Edgeworth box.

Xiao Ping and James always eats miso soup and sushi in exact proportions - one miso per two sushi. They throw away any extra soup or sushi as it would not give them any pleasure. Once, they were stuck in the office together for hours, marking students' assignments. Xiao Ping had 2 miso soups and 10 sushi with him; James had 4 miso and 4 sushi. (For the purpose of this question, assume that miso and sushi can be divided into little pieces so one-half miso or one-hundredth of sushi makes sense)

a) Draw the Edgeworth box for Xiao Ping and James. Please put Xiao Ping at the origin and James 'upside down'; put sushi on the horizontal axis and miso on vertical. Show their endowment point.

b) Show all Pareto optimal allocations of miso and sushi between Xiao Ping and James in the Edgeworth Box. Please note that this question is a bit tricky, though not difficult. Draw a bunch of indifference curves and look for tangencies