1. Suppose there are two consumers, A and B, and two goods, X and Y.The consumers have the following initial endowments and utility functions

Consumer A:

X = 1

Y = 7

U_A (X,Y) = MIN (X,Y)

Consumer B:

X = 7

Y = 1

U_B = X^1/4*Y^3/4

Suppose the Price of X is P_X = $1, and the Price of Y is P_Y = $1.

a) Suppose each consumer sells their initial endowment and buys back their optimal bundle.Draw an Edgeworth Box illustrating

The Budget Constraint

The Initial Endowment (W)

A's Optimal Bundle (A)

B's Optimal Bundle (B)

Label the initial endowment W, label A's optimal bundle A, and label B's optimal bundle B.Make sure your graph is clearly and accurately labeled.

b) For the situation above, determine for each market if there is excess demand, excess supply, or the market is in equilibrium (circle the correct answer).If there is excess demand or excess supply, determine how much it is.

Market for Good X:

Excess Demand = __________________

Excess Supply = ___________________

The market is in equilibrium

Market for Good Y:

Excess Demand = __________________

Excess Supply = ___________________

The market is in equilibrium