5. Consider an exchange economy with 2 agents and 2 goods. a. In an Edgeworth-Bowley diagram, show and illustrate that if both agents have the same preferences, the contract curve is a straight line from the bottom left-hand corner to the top right-hand corner. Explain. b. Does it follow that if the agents do not have the same preferences, the contract curve is not a straight line? Explain. c. Suppose the two agents have the same endowments and the same preferences. Is mutually beneficial trade possible? Illustrate in an Edgeworth Bowley diagram. Explain.

5. Consider an exchange economy with 2 agents and 2 goods. a. In an Edgeworth-Bowley diagram, show and illustrate that if both agents have the same preferences, the contract curve is a straight line from the bottom left-hand corner to the top right-hand corner. Explain. b. Does it follow that if the agents do not have the same preferences, the contract curve is not a straight line? Explain. c. Suppose the two agents have the same endowments and the same preferences. Is mutually beneficial trade possible? Illustrate in an Edgeworth Bowley diagram. Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

5. Consider an exchange economy with 2 agents and 2 goods.
a. In an Edgeworth-Bowley diagram, show and illustrate that if both agents have the
same preferences, the contract curve is a straight line from the bottom left-hand
corner to the top right-hand corner. Explain.
b. Does it follow that if the agents do not have the same preferences, the contract curve
is not a straight line? Explain.
c. Suppose the two agents have the same endowments and the same preferences. Is
mutually beneficial trade possible? Illustrate in an Edgeworth Bowley diagram.
Explain.
d. State and explain Walras Law. What are the implications of Walras's Law? Illustrate
Walras Law in an Edgeworth-Bowley diagram. Explain.

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6. In an Edgeworth box for two consumers, A and B, with endowments of commodities Xa and d Ya are A's endowments, Xb and Yb are B's, and Xo = Xa + Xb, Yo = Ya + Yb), the competitive equilibrium allocation of the two commodities represents a mutual tangency of both consumers' indifference curves with each other and with a common budget line. (a) The conditions require that A and B consume at a point on their budget lines where their indifference curves have the same marginal rate of substitution. and equilibrium for the market as a whole requires that the sum of the individuals' demands for each commodity must equal the totals (Xo and Yo) available. Mathematically express the point of equilibrium, that is, express the above statement with equations in relating each endowments, equilibrium points (Xa, Xb, Ya, Yb), and totals ((Xo, Yo).
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6. In an Edgeworth box for two consumers, A and B, with endowments of commodities Xa and d Ya are A's endowments, Xb and Yb are B's, and Xo = Xa + Xb, Yo = Ya + Yb), the competitive equilibrium allocation of the two commodities represents a mutual tangency of both consumers' indifference curves with each other and with a common budget line. (b) Suppose MRSa = Ya/Xa, MRSb = Yb/Xb, Xa = 10, Ya, = 100, Xb= 50, Yb = 20, and let good Y be the numeraire (Py = 1). Verify that the competitive equilibrium price is Px = 2.
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9. Consider an exchange economy with two individuals, a and b, and two goods, x and y. Individual a has utility function U"(x, y) = x?y, and individual 6 has utility function U(x, y) = 3x+4y. What condition will hold at all Pareto efficient allocations in the interior of the Edgeworth box? A. ***8yª = 3r" B. yº = { C. 8y = 3.xb D. y" = 2x"