1. Consider a simple economy with twoindividuals, John and Marsha. The economy is endowed with 30 kilograms ofcheese and 30 loaves of bread each month. John and Marsha’s preferences forbread and cheese are given by their marginal rates of substitution of bread forcheese:

                         MRS1= 10/ X1

                         MRS2=5/X2

Where X1 isthe quantity of bread consumed by John and X2 isthe quantity of bread consumed by Marsha.

(1)  Ifeach individual only had one loaf of bread, how much cheese would eachindividual be willing to give up in order to have another loaf of bread?

(2)  In theinitial allocation, each individual has 15 kilograms of cheese and 15 loaves ofbread. Draw the Edgeworth Box diagram for this economy and explain whether theinitial allocation of cheese and bread is pareto efficient.

(3)  Drawthe contract curve for this economy.