Consider an exchange economy with two goods, good 1 (x1) and good 2(x2), and two consumers, A and B. Consumer A regards the two goods as perfect complements, always wanting 2 units of good 1 for every unit of good 2, whereas B regards 4 units of good 1 and 3 units of good 2 as perfect substitutes. Initially, A has 60 units of good 1 and 75 units of good 2, and B has 140 units of good 1 and 25 units of good 2.

A) Draw an Edgeworth box (put good 1 on the horizontal axis) and show the initial position of the two consumers. Explain why the initial allocation is not an equilibrium allocation.

B) Suppose that the price of good 1 is equal to the price of good 2. On the diagram you drew in a) show the optimal bundles of the two consumers. Are the good markets clear? If not, show clearly the size of surplus or shortage in each market.

C) What must be the competitive equilibrium price ratio of this economy? Explain your answer.

D) Assuming that all the gains from trade were captured by A, what would be the equilibrium allocation of the two goods between A and B.