Question

Rob has 10 coconuts and 5 bananas, whereas Wilson has 5 coconuts but 25 bananas. Rob’s utility is UR = CB and Wilson’s utility is UW = CB1/2 .

(a) What are their initial indifference curves? What are their slopes? Is there potential for trade? (2)

(b) Rob offers Wilson 1 coconut for 5 bananas (small units). Should Wilson accept? What is the change in utility (in small units) for each if they go ahead with this trade? (2) (c) Wilson is contemplating a more favorable counter-offer. What is the bargaining range, i.e. the range of the price of bananas in terms of coconuts for which both sides would agree to a trade (in terms of small units)? (2)

(d) What condition has to be true so that no more beneficial trades can take place? (1)

(e) Now Friday sets up a shop and offers to exchange pB coconuts against one banana. With competitive exchange, what is pB? Remember that people can also consume fractions of a fruit. The demands are DC R = IR/2, DB R = IR/(2pB), DC W = (2IW )/3, and DB W = IW /(3pB). [Hint:The exchange rate should be a fraction of 23.] (3)

I just need Part (E)! Plz answer it step by step, thank you!

Answer 1