4: There is an exchange economy with two agents, A, B, and two goods, x, y....

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

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Rahul Sunny answered 1 year ago

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