Consider a small barter economy with only two individuals, John and Mark. John’s preferences for the two available goods (x and z) are given by:
UJ (x, z) = min(x, z), while Mark’s preferences are given by: UM(x, z) = x + z. There are a total of 10 units of each good available and the initial allocation of goods gives all of x to Mark and all of z to John.
(a) Draw the Edgeworth box for this economy including example indifference curves for each individual and the initial allocation of resources.
(b) In your Edgeworth box, identify all of allocations that represent Pareto improvements over the initial allocation.
(c) What would be the contract curve in this case and, assuming both individuals are rationale, where along the contract curve would bargaining lead the economy?
(d) If prices were introduced into the market, what would Px Pz be (and why)?