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Consider a pure exchange economy with only two goods, X and Y, and two consumers, A and B. The utility function of Amaira is UA(xA,yA)
Consider a pure exchange economy with only two goods, X and Y, and two consumers, A and B. The utility function of Amaira is UA(xA,yA) = 9xA+ yAwhereas the utility function of Bilal is UB(xB,yB) = min{xB,2yB}. The total endowment of good X in this economy is 30 units and the total endowment of good Y is also 30 units.
- a)Is the allocation (xA,yA) = (5,0), (xB,yB) = (25,30) Pareto efficient? Explain. Find the equation for the contract curve.
- b)Suppose that at the initial endowment allocation A and B have exactly the same amount of both goods (15 units of each good both). What would be the Walrasian (competitive) equilibrium price ratio px/pyof this economy?
- c)Find one new initial endowment allocation such that the equilibrium allocation of the economy would be now (xA,yA) = (0,15), (xB,yB) = (30,15). (Note: There are many possible endowment allocations that will do the trick; you are just asked to show formally that the one you chose supports (xA,yA) = (0,15), (xB,yB) = (30,15) as the new equilibrium of the economy).
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