2. General Equilibrium. consumers, each with the same Cobb-Douglas preferences except with differ- ent parameters. Consumer 1 has utility function u(x, x)= (x})"(x})'-«, while Consumer 2 has utility function u(x, x3) = (x}P(x})'-P. The endowment of good j owned by consumer i is denoted w. The price of good 1 is p, and the price of good 2 is 1. In the superscript, we denoted the consumer i = 1,2; in the subscript, we denote the good j= 1,2. Consider an exchange economy with two Write the maximisation problem faced by each consumer i = (a) 1,2, taking care to define the objective function and the budget constraint. Set up the Lagrangian and find the first order conditions. For each consumer i = 1,2, use the first-order conditions to (b) determine the demand functions for each consumer i = 1,2 and for each good j = 1,2, in terms of the price p.- (c) Find the aggregate demand for each good j = 1,2 and clear the markets for each good. Hence, show that the equilibrium price p; is given by the expression aw;+Bw? [(1-a)w} +(1-B)w}] Define Walras' here and show that this holds here.
2. General Equilibrium. consumers, each with the same Cobb-Douglas preferences except with differ- ent parameters. Consumer 1 has utility function u(x, x)= (x})"(x})'-«, while Consumer 2 has utility function u(x, x3) = (x}P(x})'-P. The endowment of good j owned by consumer i is denoted w. The price of good 1 is p, and the price of good 2 is 1. In the superscript, we denoted the consumer i = 1,2; in the subscript, we denote the good j= 1,2. Consider an exchange economy with two Write the maximisation problem faced by each consumer i = (a) 1,2, taking care to define the objective function and the budget constraint. Set up the Lagrangian and find the first order conditions. For each consumer i = 1,2, use the first-order conditions to (b) determine the demand functions for each consumer i = 1,2 and for each good j = 1,2, in terms of the price p.- (c) Find the aggregate demand for each good j = 1,2 and clear the markets for each good. Hence, show that the equilibrium price p; is given by the expression aw;+Bw? [(1-a)w} +(1-B)w}] Define Walras' here and show that this holds here.
Chapter4: Utility Maximization And Choice
Section: Chapter Questions
Problem 4.14P
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