Question

1. Adam and Eve live in the Garden of Eden, where they can trade only with each other. Adam is endowed with 2 units of Pleasures of the Spirit and 6 units of Pleasures of the Flesh; Eve is endowed with 4 units of Pleasures of the Spirit and 2 units of Pleasures of the Flesh. Their indifference curves, as you can see in the diagram, are somewhat unusually shaped: EVE Adam's Indifference Curves are the ones sloped like this Eve's Indifference Curves are the ones sloped like this FLESH ADAM SPIRIT A. Copy (or print) the graph above, and on it indicate: a) The endowment point. b) The Region of Mutual Advantage. c) The contract curve (that is, the set of all Pareto optimal outcomes) d) The set of all outcomes Adam and Eve might reach through direct bargaining B. Is there a Walrasian equilibrium in this situation? If so, how many Walrasian equilibria are there? In each Walrasian equilibrium, what can you say about the price of Pleasures of the Spirit relative to Pleasures of the Flesh? Use the picture above to illustrate what you're talking about.

Answer 1

This shaded region is the region of mutual trade-off zone that is advantage for both at this price ratio Adam will consume (6, 0) & Eve will consume (0, 8) These two bold lines are the contract curve that also denotes pareto-optimal allocation. By mutual bargaining, they can reach in the segment of contract curve denoted by A & B. That is between A & B Yes, there is a walrasian eq^m in this situation. There are many walrasian eq^m in this situation. Any p_1/p_2 elementof [MRS_Eve, MRS_Adam] is a walrasian equilibrium provided it clears the market. One example is shown in picture.