a. Suppose a market is introduced for the externality Eveline causes on Victor. Let us denote by px the price of this externality. Suppose "property rights" are assigned such that Victor has the right not to experience the smell of cooked cabbage. The competitive equilibrium price ratios pm and Px are equal to?b. Derive the market allocation corresponding to the new competitive equilibrium of the economy formed by Eveline and Victor (ce, me) and (cv,mv).c. Is the new competitive equilibrium Pareto efficient? Eveline and Victor share a flat in Amsterdam. They both love eating healthy and cook at homemany times. The parents of both of them are farmers and always give them some food to take tothe city. Eveline's parents give her 10kg. cabbages and 8 kg. meat per month, while Victor'sparents give him 10kg. cabbages and12 kg. meat per monthEveline loves eating cooked cabbage while Victor rather eats it raw in salads, condimented witholive oil, garlic, lemon and salt. But the biggest difference is that Victor hates the smell producedduring the cooking of cabbage. As a matter of fact, Victor feels truly embarrassed when he bringsfriends and Eveline has cooked cabbage; every single time she does, he goes all over the placeopening windows, ventilating the house and spraying room freshener.Eveline's utility from meat (m) and cabbage (c) is given byuF (mE, CE) = CE mE.3/4 1/4while Victor's utility is u (my, cv; cE) = cmcA.1/2,-1/4As the utility function for Victor clearly shows, Eveline's consumption of cabbage clearlyrepresents a disutility for him. We then say that Eveline's consumption of cabbage causes anegative externality on Victor. Let us normalize the price of cabbage to pe = 1.

A Competitive market refers to a marketplace structure in which there are many buyers and dealers,…

Answered: competitive equilibrium

Business

Economics

competitive equilibrium

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter6: Consumer Choices

Section: Chapter Questions

Problem 1SCQ: Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can...

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