Question

Consider an exchange economy consisting of two people, A and B, endowed with two goods, 1 and 2. Person A is initially endowed with ω^A= (10,0) and person B is initially endowed with ω^B= (0,20),where the first component of each vector indicates the endowment of good 1.Their preferences are given by U^A(x₁, x₂) =x₁^0.6x₂^0.4 and U^B(x₁, x₂) = 3x₁+x₂. Which of the following choices represents the contract curve in this economy (in terms of A’s coordinates)?

(a) x₂^A=(x^A₁)/3    (b) x₂^A=(2x^A₁)/9     (c) x^A₂=(x₁^A)/27    (d) x₂^A= 2x₁^A

Consider the same exchange economy from the previous question. Which of the following represent the equilibrium outcome? (p, xA1, xA2, xB1, xB2).

(a) (3,6,12,4,8)

(b) (3,9,3,1,17)

(c) (2,8,3,2,17)

(d) (2,9,2,1,18)

Answer 1