Two six-year old twins, Lisa (L) and Malcolm (M), have the following initial endowments of Cookies and Apples:

1*. Two six-year old twins, Lisa (L) and Malcolm (M), have the following initial endowments of Cookies and Apples: ” = 5, ” = 5, ‘ = 5, ‘ = 5 Let “, “denote Lisa’s consumption and ‘, ‘denote Malcolm’s consumption of Cookies and Apples. Lisa and Malcolm have the following utility functions: “(, ) = ⋅ ‘(, ) = + 2 a) Calculate a competitive equilibrium when Lisa and Malcolm decide to trade with each other. b) Draw an Edgeworth diagram with Lisa in the lower-left corner and Malcolm in the upper-right corner, where consumption of Cookies is measured on the horizontal axis and consumption of Apples is measured on the vertical axis. Identify the initial endowments and draw the indifference curves of Lisa and Malcolm consistent with these endowments. c) Show graphically the Pareto dominating space given the initial endowments and show that the competitive equilibrium is Pareto-efficient. d) Explain the contract curve concept, and depict it graphically for Lisa and Malcolm. Explore how different positions on the contract curve can be achieved by means of redistribution of endowments. (Choose a different endowment point and calculate a new equilibrium. Try to find the equation for the contract curve) e) What are the relations among the different parts of this question and the First- and Second Welfare Theorems?

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