Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Good Morning - If possible can you assist with drawing the diagrams. Thank you very much. Consider an economy that consists of two people Alice

Good Morning - If possible can you assist with drawing the diagrams. Thank you very much.

Consider an economy that consists of two people Alice (A) and Brett (B), and two goods, fruit (X) and fish (Y). Alice has 4 pieces of fruit and 8 fish. Brett has 12 pieces of fruit and 4 fish. Alice and Brett both have strictly convex indifference curves over these two goods. At the initial endowment point, Alice is willing to give up 2 fish for one piece of fruit and Brett is willing to give up 1/3 a fish for a piece of fruit.

a. Draw an Edgeworth box diagram depicting this situation. (Put fruit (X) on the horizontal axismand fish (Y) on the vertical axis). Label the axes and the endowment point E.

(10 marks)

b. Is the endowment point, E, Pareto efficient? Explain.

(5 marks)

c. Draw a line that represents the relative price of fruit to fish that is not a competitive

equilibrium. Explain why this is not a competitive equilibrium.

(10 marks)

d. Redraw the Edgeworth box diagram. Draw a line that represents the relative price of fruit to fish that clears both markets so that there is no excess or shortage in demand or supply. Explain why this is a competitive equilibrium.

(10 marks)

e. Evaluate the following statement: "The Second Fundamental Welfare Theorem means government in market economies can improve equity as they can make any final allocation of goods be a competitive equilibrium."

(5 marks)

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

Microeconomics

Authors: Robert Pindyck, Daniel Rubinfeld

9th Edition

0134184246, 9780134184241

More Books

Students also viewed these Economics questions

Question

Keep your head straight on your shoulders

Answered: 1 week ago

Question

Be straight in the back without blowing out the chest

Answered: 1 week ago

Question

Wear as little as possible

Answered: 1 week ago