Question

1. Consider the following exchange economy. There are two goods (1 and 2) and two consumers (A and B). Preferences and endowments are as follows: uA (イ·攻)-玲攻 TA _ (0,2) 2(4,0) (a) Draw an Edgeworth Box diagram to depict this economy. Your diagram should be clearly labelled, and should include the autar kic allocation as well as a couple of indifference curves for each consumer. (Indifference curves for A do not need to be precisely accurate but those for B should be.) [2 marks] (b) Identify the set of Pareto efficient allocations and indicate these in your diagram 4 marks (c) Let π denote the price ratio pi/p2 i. Compute each consumer's optimal consumption of good 1 and optimal consumption of good 2. (These may be functions of 4 marks ii. What is the Walrasian equilibrium value for π? Illustrate the associated budget line and Walrasian equilibrium allocation WEA) in your Edgeworth Box diagram 3 marks (d) Suppose B's endowment were 7B-(10,0) i. What is the equilibrium value for π in this case? [3 marks] ii. Indicate the new equilibrium budget line and WEA in an Edgeworth Box diagram [2 marks]

Answer 1

As per HOMEWORKLIB RULES I answered only a,b, c parts only