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# Financial or Public Economic Questions

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1. Consider an economy with two people, Henry and Catherine, who consume two commodities, bread and water. Suppose that, due to a drought, the authorities decide to allocate exactly half the available water to each person. In order to prevent one person from "exploiting" the other, neither person may trade away any water to the other for exchange for more bread. Set up an Edgeworth Box to depict this situation and explain why it is unlikely to be Pareto efficient.

2. Tarzan and Jane live alone in the jungle and have trained Cheetah both to patrol the perimeter of their clearing and to harvest tropical fruits. Cheetah can collect 3 pounds of fruit an hour and currently spends 6 hours patrolling, 8 hours picking, and 10 hours sleeping.
A). What are the public and private goods in this example?
B). If Tarzan and Jane are each currently willing to give up on hour of patrol for 2 pounds of fruit, is the current allocation of Cheetah's time Pareto efficient? Should he patrol more or less?

3. Rodolfo and Mimi share an apartment. The table below shows, for each temperature in the apartment, the marginal benefit (MB) to Rodolfo, the MB to Mimi, and the marginal cost (MC) of attaining that temperature:
Temp (degrees) MB to Rodolfo MB to Mimi MC
66 8 12 14
67 7 10 17
68 5 8 21
69 2 6 26
70 1 3 32

Explain why the apartment's temperature in this problem is a public good, and find the efficient temperature.

##### Solution Summary

Pareto efficiency is evaluated.

##### Solution Preview

1. Consider an economy with two people, Henry and Catherine, who consume two commodities, bread and water. Suppose that, due to a drought, the authorities decide to allocate exactly half the available water to each person. In order to prevent one person from "exploiting" the other, neither person may trade away any water to the other for exchange for more bread. Set up an Edgeworth Box to depict this situation and explain why it is unlikely to be Pareto efficient.

When the water is allocated equally between Henry and Catherine, there is only one allocation of bread between them that is Pareto optimal. It is unlikely that the bread would be allocated in such a way. When bread is not allocated in such a way, Henry and Catherine could each be made better off by trading water and bread with each other. Forcing them to have a particular water allocation (and thus a particular bread allocation) is not ...

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