Question

Emilie loves profiteroles. She makes a profiterole by combining one unit of chocolate sauce (say 8 fl oz) and two puffs (stuffed with paste). She receives one unit of utility per profiterole. Bertrand just likes to eat. He receives one unit of utility per puff or per unit of chocolate sauce. Bertrand and Emilie are on a diet that assigns points to food: pp is the number of points for a puff, and pc is the number of points for a unit of chocolate sauce. They would simply like to maintain their current weight, so the diet rules are as follows: They can consume any combination of chocolate sauce and puffs as long as the total number of points is less than (or equal to) the point-value of their endowment.
a. Suppose that Emilie and Bertrand decide to have a private party. Bertrand brings one bottle of chocolate sauce (8 units) and Emilie brings one box of puffs (16 puffs). Represent this two-consumer, two-good exchange economy in an Edgeworth box, remembering to indicate the endowment point.
b. Find the contract curve in this economy.
c. What is the equilibrium point in this Edgeworth box? What is the equilibrium price ratio?

Answer 1

Since Emilie loves profiterlos ( made by combining 1 CS and 2 P), her utlility function will become as follows:

Explanation:

U (E) = Min. (1 CS, 2P)

Since Bertrand is indifferent between CS and P, utility function becomes:

U (B) = 1 CS + 1 P

Where; CS refers to chcolate sauce, and P refers to Puff

2. Since Bertrand is indifferent chocolate sauce and puffs, the goods are perfect substitutes for him. His indifference curves can be represented as follows:

For Emily, the goods are complimentary goods, as they are always used togther

her indifference curves can be represented as shown in the file attached