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In: Economics

1.) Individual A and B have the following preferences: uA = (x1A) · (x2A)3 and uB...

1.) Individual A and B have the following preferences: uA = (x1A) · (x2A)3 and uB = (x1B ) · (x2B ). Their endowments are given by ωA = (3, 0) and ωB = (0, 3). Solve for (and graph) competitive equilibrium and the contract curve.

2.) Individual A and B have the following preferences: uA = ln(x1A) + ln(x2A) and uB = ln(x1B ) + ln(x2B ). Their endowments are given by ωA = (2, 6) and ωB = (2, 4). Solve for (and graph) competitive equilibrium and the contract curve.

3.) Now re-solve problem 2 but replace individual A’s preferences with uA = x1Ax2A +x2B. That is, individual B has a positive externality on individual A.

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Expert Solution

Rahul Sunny answered 8 months ago
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