EXERCISE 5.6

Consider an economy composed by two agents, Amanda and Bruce, and two consumption goods,1 and 2. There are two units available of good 1 and one unit of good 2, 1 = 2 and 2 = 1, and the utility function of both agents is given by ui (xi1, xi2) = (xi1)^1/2 (xi2)^1/2 , i = A, B.

1. Find the contract curve of this economy and draw it in the Edgeworth Box.

2. Find the competitive equilibrium of this economy if A = (2, 1/2) and B = (0, 1/2) . Draw it in the Edgeworth Box.

3. How do your answers change if the utility of Bruce becomes uB (xB1 , xB2) = x^B₁ ?