Suppose you and I have the same homothetic tastes over x1 and x2, and our endowments of the two goods are EM = (eM1, eM2) for me and EY = (eY1, eY2) for you.
A: Suppose also, again as in exercise 16.3, that whenever x1 = x2, MRS = ˆ’1.
(a) First, consider the case where eM1 +eY1 = eM2 +eY2. True or False: As long as the two goods are not perfect substitutes, the contract curve consists of the 45 degree line within the Edgeworth Box.
(b) What does the contract curve look like for perfect substitutes?
(c) Suppose next, and for the rest of part A of this question, that eM1 +eY1 > eM2 +eY2. Where does the contract curve now lie? Does your answer depend on the degree of substitutability between the two goods?
(d) Pick some arbitrary bundle (on either side of the 45-degree line) in the Edgeworth Box and illustrate an equilibrium price. Where will the equilibrium allocation lie?
(e) If you move the endowment bundle, will the equilibrium price change? What about the equilibrium allocation?
(f) True or False: As the economy€™s endowment of x1 grows relative to its endowment of x2, p falls.
(g) True or False: As the goods become more complementary, the equilibrium price falls in an economy with more x1 endowment than x2 endowment.
B: Suppose, as in exercise 16.3, that our tastes can be represented by the CES utility ³ function u(x1, x2) = 

(a) Derive the contract curve and compare it to your graphical answer in part A(c). Does the shape of the contract curve depend on the elasticity of substitution?
(b) If you have not done so already in exercise 16.3, derive my and your demand functions, letting p denote the price of x1 and letting the price of x2 equal 1. Then derive the equilibrium price.
(c) Does the equilibrium price depend on how the overall endowment in the economy is distributed?
(d) What happens to the equilibrium price as the economy€™s endowment of x1 grows? Compare this to your intuitive answer in A (f).
(e) Suppose eM1 +eY1 = eM2 +eY2. Does the equilibrium price depend on the elastic of substitution?
(f) Suppose eM1 +eY1 > eM2 +eY2 . Does this change your answer to (e)?

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