Question 2: Consider a competitive exchange economy with two individuals (A and B) and two goods (F and W). The total endowments of F and W are 10 each. Consumer A has the following utility function: UA = FW while consumer B has preferences such that she must have one unit of F for every unit of W. (a) Derive an expression for the contract curve and illustrate in an Edgeworth box dia- gram. (b) What is the relative price of F, PF/Pw, in a competitive equilibrium? (c) Now suppose that consumer B's utility function is UB = F +2W Let consumer A's utility function remain unchanged. Derive an expression for the con- tract curve now and illustrate in a new Edgeworth box diagram. (d) What is the relative price of F, Pr/Pw, in a competitive equilibrium?
Question 2: Consider a competitive exchange economy with two individuals (A and B) and two goods (F and W). The total endowments of F and W are 10 each. Consumer A has the following utility function: UA = FW while consumer B has preferences such that she must have one unit of F for every unit of W. (a) Derive an expression for the contract curve and illustrate in an Edgeworth box dia- gram. (b) What is the relative price of F, PF/Pw, in a competitive equilibrium? (c) Now suppose that consumer B's utility function is UB = F +2W Let consumer A's utility function remain unchanged. Derive an expression for the con- tract curve now and illustrate in a new Edgeworth box diagram. (d) What is the relative price of F, Pr/Pw, in a competitive equilibrium?
Chapter13: General Equilibrium And Welfare
Section: Chapter Questions
Problem 13.5P
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Transcribed Image Text:Question 2: Consider a competitive exchange economy with two individuals (A and B)
and two goods (F and W). The total endowments of F and W are 10 each. Consumer
A has the following utility function:
UA = FW
while consumer B has preferences such that she must have one unit of F for every unit
of W.
(a) Derive an expression for the contract curve and illustrate in an Edgeworth box dia-
gram.
(b) What is the relative price of F, PF/Pw, in a competitive equilibrium?
(c) Now suppose that consumer B's utility function is
UB = F +2W
Let consumer A's utility function remain unchanged. Derive an expression for the con-
tract curve now and illustrate in a new Edgeworth box diagram.
(d) What is the relative price of F, Pr/Pw, in a competitive equilibrium?
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