the preferences of two individuals are represented by the following equations: U1 = X1Y1 and U2...

the preferences of two individuals are represented by the following equations:

U1 = X1Y1 and U2 = X2Y2; where U1 denotes the utility of person 1; X1 and Y1 denote this person's consumption of goods X and Y, respectively; while U2, X2 and Y2 stand for the corresponding variables of person 2. Person 1 is endowed with 2 units of X and 12 units of Y, whereas person 2 is endowed with 4 units of X and 6 units of Y.

A. Derive the first person's demand for X as a function of PX and PY; where PX and PY represent the prices per unit of X and Y, respectively.

B. Assuming that the two individuals exchange as perfect competitors, find the equilibrium value of the price ratio PX/PY.

C. Calculate the first person's gain from exchange.

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Expert Solution

Rahul Sunny answered 2 weeks ago

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