Please explain how to do this. Thank you Two individuals, A and B, are free to e

Question

Please explain how to do this. Thank you

Two individuals, A and B, are free to engage in trade of clothing and food. Initially, A has 12 units of clothing and 9 units of food,, and B has 8 units of clothing and 11 units of food. The individuals have the following utility functions in clothing C and food F: Ua = 0.15Qc QF UB = 0.08QC Qf where QF represents units of food, Qc represents units of clothing, and U represents utility. Determine if a mutually beneficial trade is possible between A and B. If so, who would trade for what? Use the Edgeworth box analysis to present this situation, and show how Pareto efficiency could be made.

Explanation / Answer

A) MARGINAL UTILITY OF A = 12/9 =4/3

MARGINAL UTILITY OF B = 8/11

SO MU a > MUB SO MUTUALLY BENEFICIAL TRADE IS POSSIBLE A WOULD EXPORT CLOTH AND B WOULD EXPORT FOOD

B) PAARETO EFFICIENY IN REACHED WHEN MARGINAL UTILITY OF A = MARGINAL UTILITY OF B EXCHANGE 2 UNITS OF CLOTH FOR I UNIT OF FOOD

SO FOR BOTH MARGINAL UTILITY BCOMES 1

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