Bert has an initial endowment of 10 units of food and 10 units of clothing. Ernie’s initial endowment consists of 10 units of food and 20 units of clothing. Represent these initial endowments in an edgeworth box.
A) Bert regards food and clothing as perfect 1-for-1 substitutes. Ernie regards them as perfect complements, always wanting to consume 3 units of clothing for every 2 units of food. Describe the set of allocations that are pareto preferred to the one given.
B) Describe the contract curve for the initial allocation.
C) What relative price will be required to sustain an allocation on the contract curve?
D) How will your answer to problem B, if 5 units of Ernie’s clothing endowment are given to Bert?