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Completion of this tutorial exercise will count towards your Tutorial Participation assess- ment. Mary (consumer 1) and Lucy (consumer 2) are the only two consumers
Completion of this tutorial exercise will count towards your Tutorial Participation assess- ment.
Mary (consumer 1) and Lucy (consumer 2) are the only two consumers in the economy. Each of them consumes only two goods, fish (goodx) and chips (goody), which they also own. Consumer 1's utility function is given by
U1(x,y) =x2y3
She has 25 units ofxand 5 units ofy. Consumer 2's utility function is given by
U2(x, y) = lnx+ lny.
She has 6 units ofxand 20 units ofy. Letpbe the price ofxand normalise the price of
yto 1.
- (a)(4 marks) Draw the Edgeworth Box of this economy, marking clearly the endow- ment point. For each consumer, sketch the indifference curve passing through the endowment point.
- (b)(2 marks) Calculate the marginal rate of substitution for each consumer at the endowment point.
- (c)(2 marks) Who is going to sellxand buyy? Why?
- (d)(5 marks) Find the demand of consumer 1 forxdenote it asx1and the demand
- of consumer 1 forydenote it asy1.
- (e)(5 marks) Find the demand of consumer 2 forxdenote it asx2and the demand
- of consumer 2 forydenote it asy2.
- (f)(4 marks) Find the equilibrium price of goodx.
- (g)(4 marks) Find the equilibrium consumption bundle of each consumer.
- (h)(4 marks) Mark your answer to part (g) in the Edgeworth Box you have drawn for part (a). Draw the budget line under the equilibrium price. For each consumer, draw the indifference curve passing through the equilibrium consumption bundle.
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