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Consider an exchange economy with two agents, A, B, and two goods,  x, y. A's endowment is...

Consider an exchange economy with two agents, A, B, and two goods,  x, y. A's endowment is x = 6, y = 4, and B's endowment is x = 4, y = 6.

(a) Suppose that A has utility function  u(x, y) = x + y  and B has utility function u(x, y) = xy. Find a competitive equilibrium allocation (CEA) and associated equilibrium prices. What difference would it make if A's endowment is x = 3, y = 1, and B's endowment is x = 7, y = 9? (Diagrammatic/geometric reasoning is sufficient.)

(b) A has utility function u(x, y) = x2 + y2 (for which the indifference curves which are “bowed out”); B’s utility function is min{x, y}. Find the contract curve for this economy. Is there a competitive equilibrium allocation (CEA) for some prices?

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Rahul Sunny answered 2 years ago
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