Johnny and June are divorcing and must divide their music collection, which contains two types of music: country and folk. A mediator suggests an initial division of the collection. Given the initial division, Johnny's MRS between folk and country is 3, and June's MRS is 1.
a. Use an Edgeworth box to show that the allocation of music is inefficient. Be sure to draw indifference curves for both Johnny and June, and to show their respective marginal rates of substitution at the initial allocation.
b. Suggest a general reallocation that could potentially make both parties better off. Explain who would have to give up folk music and who would have to give up country.
c. After some reallocation, Johnny's MRS and June's MRS are equal. Show that the allocation is Pareto-efficient.