Question

1*. Two six-year old twins, Lisa (L) and Malcolm (M), have the following initial endowments of Cookies and Apples: �" = 5, �" = 5, �' = 5, �' = 5 Let �", �"denote Lisa’s consumption and �', �'denote Malcolm’s consumption of Cookies and Apples. Lisa and Malcolm have the following utility functions: �"(�, �) = � ⋅ � �'(�, �) = � + 2�

A) Explain the contract curve concept, and depict it graphically for Lisa and Malcolm. Explore how different positions on the contract curve can be achieved by means of redistribution of endowments. (Choose a different endowment point and calculate a new equilibrium. Try to find the equation for the contract curve)

B) What are the relations among the different parts of this question and the First- and Second Welfare Theorems?

Answer 1