In an exchange economy with two consumers and two goods, consumer A has utility function U!...

In an exchange economy with two consumers and two goods, consumer A has utility function U! (xA,yA) = xA*yA, consumer B has utility function U! (xB,yB) = xB*yB. Let (x ̄A,y ̄A) represent the endowment allocation of consumer A and (x ̄B,y ̄B) represent the endowment allocation of consumer B. The total endowment of each good is 20 units. That is, x ̄A + x ̄B = 20 and y ̄A + y ̄B = 20. Set y as a numeraire.

a) Derive the contract curve in terms of xA and yA . As x ̄A increases (without changing the total endowment of x), how does the contract curve change?

b) Find the equilibrium price of x and the equilibrium allocation. As x ̄A increases (without changing the total endowment of x), how do the equilibrium price and consumer B’s consumption of x in equilibrium change?

Expert Solution

Rahul Sunny answered 2 years ago

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