Suppose that there are two individuals (X and Y) and two goods (Food and Clothes) in...

Suppose that there are two individuals (X and Y) and two goods (Food and Clothes) in an economy (Food is in horizatal axes). The initial endowment of X is 50 units of Food and 70 units of of Clothes and initial endowment of Y is 60 units of Food and 40 units of Clothes. Price of Food is $ 96 and price of Clothes is $ 32 . A) What is the price ratio (slope of price line)? B) What much should individuals trade for one good another to assure competitive equilibrium? C) Specify them as ratio of Clothes/Food. D) If X wants to sell 58 units of Food and Y wants to sell 174 units of Clothes, would a competitive equilibrium be formed? Why?

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Expert Solution

At the equilibrium, rate of trade between the two goods of both individuals should equal the price ratio.

Since, price ratio = 3

hence, at equilibrium, it implies that if any of the two individuals want one extra unit of food then he has to sacrifice 3 units of clothes.

Similarly, if any of the two individuals want one extra unit of cloth then he has to sacrifice 1/3 unit of food.

Also equilibrium implies that there is no excess demand of any one of the goods.

Rahul Sunny answered 1 year ago

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