Pete and Paul live in an exchange economy (so we can use the Edge worth-box). The economy has endowment of 10 cheese slices and 10 crackers. Pete has distinguished taste, he likes to eat cheese with cracker, to the extent that he considers them perfect complements, his utility is U=min{ch, cr}, where ch=cheese consumption and cr=crackers consumption. Paul cares only about satisfying calorie requirements; he considers cheese and crackers perfect substitutes. His utility function is U=ch+cr.
a) Is Pete consuming 3 crackers and 5 cheeses slices a Pareto-optimal allocation? If not, how could you rearrange the consumption of Pete and Paul to arrive at better allocation?
b) Using Edge worth-box, draw a Pareto-optimal allocation.
c) Using the logic of your answer for part a, draw the contract curve.