Adam and Eve live in the Garden of Eden and can trade only with each other. Adam is endowed with 60 units of Pleasures of the Spirit and 80 units of Pleasures of the Flesh. Eve is endowed with 40 units of Pleasures of the Spirit and 120 units of Pleasures of the Flesh. Adam’s indifference curves are L-shaped, with corners at points of the form (x, 2x) (where the first coordinate measures Pleasures of the Spirit). Eve’s indifference curves are straight lines of slope? 3/4 (when Pleasures of the Spirit are plotted on the horizontal axis).
a) If a Pleasure of the Spirit sells for 1/2 Pleasures of the Flesh, how many will Eve want? If a Pleasure of the Spirit sells for 2 Pleasures of the Flesh, how many will Eve want? If a Pleasure of the Spirit sells for 3/4 Pleasures of the Flesh, how many will Eve want?
b) Illustrate the Walrasian Equilibrium. Explain carefully why it is a Walrasian Equilibrium.