Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider an exchange economy with two agents, 1 and 2, and two goods, apples and bananas. The agents' preferences are represented by the utility functions

image text in transcribed
image text in transcribed
Consider an exchange economy with two agents, 1 and 2, and two goods, apples and bananas. The agents' preferences are represented by the utility functions \"1(95113'1) = x1 + 1n(1 + 3'1), \"2 (352:3'2) = x2 + 21110 + 372), where 1n stands for the natural logarithm and, for i = 1, 2, x, denotes agent i's consumption of apples and y, denotes agent i's consumption of bananas. Before trade, agent 1 owns 10 apples and 0 bananas while agent 2 owns 0 apples and 10 bananas. (a) Describe all the efcient (i.e., Pareto optimal) allocations of this exchange economy. Recall that not all agents need consume a strictly positive quantity of all goods. (b) Compute the competitive equilibrium of this exchange economy. Without loss of generality, normalize the unit price of apples to 1, and denote the unit price of bananas by p. What is the equilibrium price of bananas? What are the agents' equilibrium consumptions of apples and bananas

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations Of Global Financial Markets And Institutions

Authors: Frank J. Fabozzi, Frank J. Jones, Francesco A. Fabozzi, Steven V. Mann

5th Edition

0262039540, 978-0262039543

More Books

Students also viewed these Economics questions