Question

Suppose individuals A and B start with endowments (3,7) and (7,3),respectively. *Please answer all parts of the question including #5,6,7,8,9,10,11*

1. Draw the Edgeworth box and label the initial endowments.

2. Are the final allocations (6, 3) and (5, 6) feasible?

3. Suppose that individual A has utility function UA = xA1 + 2xA2 . Draw a few of A’s indifference curves on the Edgeworth box. (Make sure you’ve drawn them correctly.)

4. Suppose that individual B has utility function UB = 2xB1 + xB2 . Draw a few of B’s indifference curves on the Edgeworth box. (Make sure you’ve drawn them correctly.)

5. Shade the region of the graph corresponding to feasible allocations which are Pareto improvements over the initial endowments.

6. Would the final allocations (1,9) and (9,1) be feasible? Are they Pareto optimal?

7. Would the final allocations (0, 10) and (10, 0) be feasible? Are they Pareto optimal?

8. Is there a set of prices which could implement the final allocations (0,10) and (10, 0)?

9. Would the final allocations (0,9) and (10,1) be feasible? Are they Pareto optimal?

10. Is there a set of prices which could implement the final allocations (0, 9) and (10, 1)?

11. Is there a unique general equilibrium with these endowments and utility functions? (What is/are the general equilibrium/equilibria?)

Answer 1