8. Example: Consider again the Edgeworth box economy in Question 7. Canthe allocation (x',²) = ((1,1), (3,3)) be supported as a price equilibrium withtransfers? If yes, find the supporting prices and transfers. If no, explain.Solution:Yes. Allocation (x', x²) is feasible and Parento Optimal.MRS'3.MRS =3.- MRS' = MRS?So, by the Second Welfare Theorem, we can support this allocation as an equi-librium with transfers. The supporting prices are given by the MRS of theconsumers at this allocation. That is, 2 = 1. With our normalization, we getP1 = 1, P2 = 1. So, for transfers,PaT: = (p1, p2) (x}, x) – (p1,p2)·(e},e5)= (1,1) (1,1)- (1,1) (1,3) = -2T2 = -T1 =2

Yes transfer is possible at price equilibrium allocation. Then the price will be ...

8. Example: Consider again the Edgeworth box economy in Question 7. Can the allocation (x",2) = ((1,1), (3,3) be supported as a price equilibrium with transfers? If yes, find the supporting prices and transfers. If no, explain. Solution: Yes. Allocation (r',x²) is feasible and Parento Optimal. MRS' x =1 MRS? - MRS' MRS So, by the Second Welfare Theorem, we can support this allocation as an equi- librium with transfers. The supporting prices are given by the MRS of the consumers at this allocation. That is, 2 = 1. With our normalization, we get P1 =1, P2 = 1. So, for transfers, T1 = (p1, p2)-(z)- (p1,p2)-(e,e) = (1,1)-(1,1)-(1,1)-(1,3) = -2 T2 = -T1=2

8. Example: Consider again the Edgeworth box economy in Question 7. Can the allocation (x",2) = ((1,1), (3,3) be supported as a price equilibrium with transfers? If yes, find the supporting prices and transfers. If no, explain. Solution: Yes. Allocation (r',x²) is feasible and Parento Optimal. MRS' x =1 MRS? - MRS' MRS So, by the Second Welfare Theorem, we can support this allocation as an equi- librium with transfers. The supporting prices are given by the MRS of the consumers at this allocation. That is, 2 = 1. With our normalization, we get P1 =1, P2 = 1. So, for transfers, T1 = (p1, p2)-(z)- (p1,p2)-(e,e) = (1,1)-(1,1)-(1,1)-(1,3) = -2 T2 = -T1=2

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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