An example of Walras law Suppose there are only three goods 1x1, x2, x32 in an economy
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An example of Walras’ law Suppose there are only three goods 1x1, x2, x32 in an economy and that the excess demand functions for x2 and x3 are given by ED2 5 2 3p2 p1 1
2p3 p1 2 1, ED3 5 2 4p2 p1 2 2p3 p1 2 2.
a. Show that these functions are homogeneous of degree 0 in p1, p2, and p3.
b. Use Walras’ law to show that, if ED2 5 ED3 5 0, then ED1 must also be 0. Can you also use Walras’ law to calculate ED1?
c. Solve this system of equations for the equilibrium relative prices p2/p1 and p3/p1. What is the equilibrium value for p3/p2?
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Related Book For 
Microeconomic Theory Basic Principles And Extensions
ISBN: 9781305505797
12th Edition
Authors: Walter Nicholson, Christopher M. Snyder
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