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Consider an exchange economy with two consumers, Jack and Blue, who trade only two goods: Cookies and Hats. Quantities of Cookies are measured vertically, and quantities of Hats are measured horizontally. Jacks origin should be placed at the bottom left. Hats Cookies IC IC₂ Blues с

Consider an exchange economy with two consumers, Jack and Blue, who trade only two goods: Cookies and Hats. Quantities of Cookies are measured vertically, and quantities of Hats are measured horizontally. Jacks origin should be placed at the bottom left. Hats Cookies IC IC₂ Blues с

Microeconomic Theory
Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter4: Utility Maximization And Choice
Section: Chapter Questions
Problem 4.1P
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Hi. Please help me with the 3 questions attached.

Consider an exchange economy with two consumers, Jack and Blue, who trade only two goods: Cookies and Hats. Quantities of Cookies are measured vertically, and quantities of Hats are measured horizontally. Lacks origin should be placed at the bottom left. Cookies Jack Hats 10₂ 10₂ IC₂ Blues с Hats Cook The first curve, labelled IC, represents a lower level of utility, while the third curve, labelled IC₁, represents a higher level of utility. The first curve, labelled ICBI, represents a lower level of utility, while the third curve, labelled ICB3, represents a higher level of utility. Question 1: Using a new box diagram like the one above for Jack and Blue, mark a possible initial endowment point and, with the help of a budget constraint line and indifference curves, show an excess demand for Hats at a given price and explain the economic significance of excess demand. Label your diagram in full. Question 2: Reproduce the diagram you used above and explain what must happen to the price of Hats relative to the price of cookies for equilibrium to be established, eliminating the excess demand for Hats. Show this on your diagram and explain the adjustment process and equilibrium outcome in full. Question 3: Discuss in full the implications for efficiency and fairness of the First Welfare Theorem and the Second Welfare Theorem
Transcribed Image Text:Consider an exchange economy with two consumers, Jack and Blue, who trade only two goods: Cookies and Hats. Quantities of Cookies are measured vertically, and quantities of Hats are measured horizontally. Lacks origin should be placed at the bottom left. Cookies Jack Hats 10₂ 10₂ IC₂ Blues с Hats Cook The first curve, labelled IC, represents a lower level of utility, while the third curve, labelled IC₁, represents a higher level of utility. The first curve, labelled ICBI, represents a lower level of utility, while the third curve, labelled ICB3, represents a higher level of utility. Question 1: Using a new box diagram like the one above for Jack and Blue, mark a possible initial endowment point and, with the help of a budget constraint line and indifference curves, show an excess demand for Hats at a given price and explain the economic significance of excess demand. Label your diagram in full. Question 2: Reproduce the diagram you used above and explain what must happen to the price of Hats relative to the price of cookies for equilibrium to be established, eliminating the excess demand for Hats. Show this on your diagram and explain the adjustment process and equilibrium outcome in full. Question 3: Discuss in full the implications for efficiency and fairness of the First Welfare Theorem and the Second Welfare Theorem
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