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1. Consider an exchange economy where two agents i = A, B have the following prefer- ences over two goods a and y : u4(24,

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1. Consider an exchange economy where two agents i = A, B have the following prefer- ences over two goods a and y : u4(24, y4 ) = rayA uB(xB,yB) = vr+y Let the initial endowment be e = (ed, eB) where ed = (2, 2) and eB = (2, 2). (a) Draw an Edgeworth box and clearly indicate the individuals' preferences and the initial allocation. (b) Normalize the prices so that pr = p and py = 1. Find the equilibrium, and indicate the equilibrium allocation in the Edgeworth box. (c) Is the equilibrium Pareto efficient? Is the initial allocation Pareto efficient? Verify that both agents' utility levels are higher with the equilibrium allocation than with the initial endowment. (d) State Walras' law and verify that it holds in equilibrium. Does Walras' law hold only in equilibrium

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