Consider a pure-exchangeeconomy consisting of two consumers, George and Saddam, and two goods, beer (b) and oil (o). Initially, each consumer isendowed with 5 gallons of beer and 5 barrels of oil. George has utility function
uG(b, o) = b + 2o
and Saddam has utility function
uS(b, o) = 2b + o.
(a) Draw an Edgeworth box diagram for this economy. Label the axesand the dimensions of the box. Indicate the initial allocation and draweach consumer's indifference curve through the initial allocation.
(b) Identify on your diagram the set of all Pareto efficientallocations.
(c) Suppose each good has a market price of 1. Illustrate on yourdiagram the bundles demanded by each consumer. Is this a competitive equilibrium?