Question
Consider a two-person (A and B), two-commodity (1 and 2) pure exchange economy. Suppose that individual A's preferences can be represented by the utility function
Consider a two-person (A and B), two-commodity (1 and 2) pure exchange economy. Suppose that individual A's preferences can be represented by the utility function UA(q1A, q2A) = q1A + ln(q2A), where q1A is individual A's consumption of commodity one and q2A is individual A's consumption of commodity two. Similarly, suppose that individual B's preferences can be represented by the utility function UB(q1B, q2B) = q1B + 2ln(q2B), where q1B is individual B's consumption of commodity one and q2B is individual B's consumption of commodity two. Individual A is endowed with one units of commodity one and two units of commodity two, while individual B is endowed with two units of commodity one and one unit of commodity two.
- What are the dimensions of the Edgeworth-Bowley box diagram that can be used to depict this economy?
- Find the set of Pareto efficient allocations for this economy.
- Find the set of individually rational allocations for this economy.
- Find the contract curve for this economy.
- Illustrate your answers in an Edgeworth-Bowley box diagram.
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