1 General Equilibrium Endowment Economy An economy is comprised of two individuals, Mr. A and Mr....

1 General Equilibrium Endowment Economy An economy is comprised of two individuals, Mr. A and Mr. B. Each individual derives satisfaction from consuming goods x and y. Each is endowed with the following quantities of each good: XA = 30 YA = 60 XB = 20 YB = 20 Suppose Mr. A and Mr. B’s preferences are represented by the following utility functions: uA(xa, ya) = x 1 3 a y 2 3 a uB(xb, yb) = x 1 2 b y 1 2 b 1. Write down each individuals’ budget constraint. 2. Derive market demand functions for both good x and good y. 3. Find an expression that represents market supply in both markets. 4. Solve for the (partial) equilibrium prices in each of the markets. 5. Solve for the (general) equilibrium price ratio. 6. Can you determine a unique equilibrium price level in each market? Why or why not? 7. Solve for the equilibrium allocation of the goods. Prove that this allocation is Pareto efficient.

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Rahul Sunny answered 3 months ago

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