16.7 Suppose there are only three goods (X,, X2, and X3) in an economy and that the...

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16.7 Suppose there are only three goods (X,, X2, and X3) in an economy and that the excess demand functions for X> and X3 are given by ED2 = -SPj/P, + 2PJP, - 1 ED3 = 4P2/P, - %PJPX - 2.

a. Show that these functions are homogeneous of degree zero in Px, P2, and Ps.

b. Use Walras' law to show that if ED2 = ED3 = 0, ED1 also must be 0. Can you also use Walras' law to calculate ED{?

c. Solve this system of equations for the equilibrium relative prices P2/Pi and PJP\. What is the equilibrium value for PJP^

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