An economy consists of two persons, Jill and Ella, trading fixed endowments of two goods, Cola and Pepsi. Total endowments in the economy are 100 Cola and 500 Pepsi. Initially Jill has 20 Cola and 300 Pepsi. After they engage in trade, Ella has 60 Pepsi and 400 Cola.
a) What is the market clearing price ratio?
b) If we normalise the price of Pepsi at 1, what is the initial wealth of each consumer? Does this wealth change for each consumer after the trade took place? Explain.
c) Why do you think Jill and Ella engaged in the trade?