3. Anjali and Bala are neighbs Anjali likes to use her chain saw, but Bala does

Question

3. Anjali and Bala are neighbs Anjali likes to use her chain saw, but Bala does not like the noise. They each have $1,000. Let A denote Anjali's money spent on other goods, and let denote Bala's. Let e denote the percentage of the time that Anjali uses her chain saw. Anjali and Bala have the following preferences 1/21/2 up(z, c) zi/2(100-c)1/2. = (i) Assume that Anjali has the right to use her chain saw all the time. Draw the Edgeworth box the endowment point, and the contract curve (Put Anjali's origin in the lower left corner.) Is this endowment Pareto efficient? Explain (i) If they use the price mechanism to reach a Pareto efficient allocation, what percentage of the time will the chain saw be used? What will be the price of a one per cent increase/decrease in usage, and who will pay it to whom? iii) What are the endowment and the equilibrium usage if Bala has the right to a quiet environ ment (i.e., no chain saw use)?

Explanation / Answer

It doesn't really matter where you put your market and non-market goods as long as you are consequent.

Ill just walk you through your graphing:

Lets put non-market goods on the Y and market goods on the X axis.

Anjali provides 4*15=$60 worth in non-market goods, regardless of how much Sanu earns. If Sanu only works at home, he will provide 10*16=$160 worth in non-market goods.

Therefore their maximum consumption in Y equals 60+160=$220

This is the point (x,y)=(0,220) on the graph.

If Sanu decides to only work outside of the home, he earns 20/hour

--> maximum earnings=20*16=320

In this case, Sanu earns $320 dollars and Anjali provides $60 in non-market goods

This is the point (x,y)=(320,60)

To complete the budget, draw a vertical line from the last point to the x-axis (to point (320,0))

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