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7. Consider a 2 x 2 pure exchange economy with two consumers, Andy and Beth, or {A, B}, and two goods { 1, 2). Andy
7. Consider a 2 x 2 pure exchange economy with two consumers, Andy and Beth, or {A, B}, and two goods { 1, 2). Andy has endowment es - (1, 3) and Beth has endowment eB = (3, 1). Andy's preferences can be represented by the utility function uA = CAIXA2 and Beth's preferences can be represented by the utility function UB = XB1XB2 - 2xA1. Notice that Andy's consumption of good 1 creates a negative externality for Beth. (a) Find the Walrasian Equilibrium. (5 marks) (b) Justify that in economies without externalities, each player does at least as well in Walrasian Equilibrium than from their initial endowment. (3 marks) (c) Compute Beth's utility at the initial endowment and at the Walrasian Equilibrium. (2 marks)
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