Morris has the utility function U(b, w) = 4b + 16w and Philip has the utility function U(b, w) = bw, where b is the number of books consumed per month and w is bottles of wine consumed per month. If we draw an Edgeworth box with books on the horizontal axis and wine on the vertical axis and if we measure Morris's consumptions from the lower left corner of the box, then the contract curve contains

Question

Quizplus · Accepted Answer

To find the contract curve, we need to find the set of points where Morris and Philip have the same level of utility. 
Morris's utility function is U(b,w) = 4b + 16w, which means he values wine four times higher than books. Philip's utility function is U(b,w) = bw, which means he values books and wine equally. 
To find the contract curve, we first draw the 45-degree line running from the lower left corner of the box to the upper right corner. This line represents the combinations where Morris and Philip have the same level of utility, which is when bw = 4b + 16w, or b/w = 4/16 = 1/4. 
Any point along this line represents a Pareto-efficient allocation of resources between the two consumers, since neither can be made better off without making the other worse off. 
The answer choice that describes a straight line with slope 1/4 passing through the upper right corner of the box is the correct one.

Morris Has the Utility Function U(b, W) = 4b