Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Mary (consumer 1) and Lucy (consumer 2) are the only two consumers in the economy. Each of them consumes only two goods, fish (good
Mary (consumer 1) and Lucy (consumer 2) are the only two consumers in the economy. Each of them consumes only two goods, fish (good x) and chips (good y), which they also own. Consumer 1's utility function is given by U (x, y) = xy She has 25 units of x and 5 units of y. Consumer 2's utility function is given by U2(x, y) Inx+lny. = She has 6 units of x and 20 units of y. Let p be the price of x and normalise the price of y to 1. (a) (4 marks) Draw the Edgeworth Box of this economy, marking clearly the endow- ment point. For each consumer, sketch the indifference curve passing through the endowment point. (b) (2 marks) Calculate the marginal rate of substitution for each consumer at the endowment point. (c) (2 marks) Who is going to sell x and buy y? Why? (d) (5 marks) Find the demand of consumer 1 for x-denote it as x-and the demand of consumer 1 for y-denote it as y. (e) (5 marks) Find the demand of consumer 2 for x-denote it as x-and the demand of consumer 2 for y-denote it as y. (f) (4 marks) Find the equilibrium price of good x. (g) (4 marks) Find the equilibrium consumption bundle of each consumer. (h) (4 marks) Mark your answer to part (g) in the Edgeworth Box you have drawn for part (a). Draw the budget line under the equilibrium price. For each consumer, draw the indifference curve passing through the equilibrium consumption bundle.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To solve the problem we will address each part step by step a Draw the Edgeworth Box 1 Dimensions of the Box The total amount of good x is 25 6 31 and ...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started