1. Consider an exchange economy with two market participants A and B, and two goods x and y. They have initial endowments (ωAX , ωAY ) = (6, 25), and (ωBX , ωBY ) = (8, 4), and their utilities are UA(xA, yA) = xA yA2 and UB(xB, yB) = xB yB + yB.
a) Draw the Edgeworth box representing this exchange economy, the initial endowments and the pareto improving allocations.
b) Define the equation for the contract curve, draw the contract curve and the core of this economy.
c) Find the price ratio (1/p2) for an optimal allocation in this economy.