Question
Looking for guidance only on how to answer question Johnny and Jeffrey are watching a show when they decide that they dont want to go
Looking for guidance only on how to answer question
Johnny and Jeffrey are watching a show when they decide that they dont want to go to the outside world for a considerable amount of time. Their scarcity of skills means they must utilize the goods that they can find. Johnny manages to collect 3 granola bars and 12 jolly ranchers, while Jeffrey scrounges together 3 jolly ranchers and 5 granola bars. Although they are friends they both have different preferences over them; Johnny's utility function is (Xjr, Xg) = XjrX0.5g and Jeffrey's utility function is (Xjr, Xgb) = 2X2jrXg , where Xjr is the number of jolly ranchers and Xgb represents the number of granola bars that they consume.
A) Solve for the set of Pareto Optimal allocations of gummy worms and granola bars across Johnny and Jeffrey. Analyze the results.
Now, suppose the two friends decide to trade. B) Normalize price of jolly ranchers and find their demand functions for granola bars. C) Write the excess demand function for granola bars.
D) Find the equilibrium price of granola bars (P*g) that clears the two markets. How many granola bars and how many jolly ranchers does each of them consume in the competitive equilibrium? E) Write down the competitive equilibrium. Explain the role that the relative prices in ensuring that competitive markets result in a Pareto Optimal allocation. F) Show that this competitive allocation is a Pareto improvement over the initial endowment
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