Smith and Jones are stranded on a desert island. Each has in her possession some slices of ham (H) and cheese (C). Smith
prefers to consume ham and cheese in the xed proportions of 2 slices of cheese to each slice of ham. Her utility function
is given by US = Mz«(10H, 5C). Jones, on the other hand, regards ham and cheese as perfect substitutes—she is always
willing to trade 3 slices of ham for 4 slices of cheese, and her utility function is given by Uj = 4H + 3C. Total endowments
are 100 slices of ham and 200 slices of cheese.
a. Draw the Edgeworth Box diagram for all possible exchanges in this situation. What is the contract curve for this
exchange economy?
b. Suppose Smith's initial endowment is 40 slices of ham and 80 slices of cheese (Jones gets the remaining ham and
cheese as her initial endowment). What mutually benecial trades are possible in this economy and what utility levels will
Smith and Jones enjoy from such trades?
c. Suppose that 20 slices of ham could be transferred without cost from Jones' to Smith's endowment. Now what mutually
benecial trades might occur and what utility levels would be experienced by Smith and Jones?
d. Suppose that Jones objects to the transfer of ham proposed in part c and states, ''I'd rather throw the ham away than
give it to Smith.'' If Jones carries through on her threat, what mutually benecial trades are now possible and what utility
levels will be experienced by Smith and Jones?
e. Suppose that Smith expects the ham transfer from Jones and, through carelessness, allows 20 slices of her initial ham
endowment to spoil. Assuming the transfer from Jones actually happens, now what mutually benecial trades are
possible, and what are the potential utility levels for Smith and Jones?
f. Suppose now that both of the adverse incentive effects mentioned in parts d and e occur simultaneously. What mutually
benecial trading opportunities remain, and what are the potential utility levels for Smith and Jones?