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Question 3 Two individuals, a and b, consume goods x and y. Their endowments are wa= (2, 5) and w = (10, 1). Both have
Question 3 Two individuals, a and b, consume goods x and y. Their endowments are wa= (2, 5) and w = (10, 1). Both have identical utility functions Ui(xi, yi) =(Inxi + Inyi )1/2 where i = a, b. The price py = 1 and for simplicity, we write px = p. (Hint: Remember that a monotonic transformation of a utility function represents the same preferences, i.e., MRS does not change. Can you see a monotonic transformation in the given utility function that can simplify the calculation?) a. Derive individual i's demand for good x and good y if mi is the income of individual i. (2 marks) b. Derive the equation of contract curve. c. Calculate the equilibrium price p * and the quantity ((xa, ya), (x, yb)). d. Check that the equilibrium quantity is Pareto efficient
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