Answered step by step
Verified Expert Solution
Question
1 Approved Answer
4. (15 pts.) Suppose that Anne and Bart can trade with each other. Anne's utility function is UA(XA, YA) = XANA and Bart's utility function
4. (15 pts.) Suppose that Anne and Bart can trade with each other. Anne's utility function is UA(XA, YA) = XANA and Bart's utility function is UB (XB, VB) = min (3XB, 2yB) where xA and yA are Anne's consumption of x and y, while XB and yB are Bart's consumption of x and y. Anne is endowed with 2 of x and 9 of y, and Bart is endowed with 8 of x and 6 of y. a) Draw an edgeworth box, showing the initial endowment allocation, e, and Anne's and Bart's indifference curves going through point e. (3 pts.) b) What are the pareto efficient allocations? (4 pts.) c) What are the competitive equilibrium price ratio (or prices) and its allocation ((xA, VA), (x;, VB))? (5 pts.) d) Describe the equilibrium trade between Anne and Bart that gets the allocation from the initial endowment e to the competitive equilibrium allocation and show that the trade is consistent with the price ratio from part c). (3 pts.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started