Econ100B PS6 Solutions

Econ100B PS6 Solutions - ECO 100B Problem Set 6 Answers...

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Problem Set 6 Answers will be posted on June 6, 2008 1. Alice and Bob consume milk, M , and cookies, C U A = M A C A and U B = M 0 : 5 B C 0 : 5 B . Their initial endowments are M A = 10 ;C A = 20 , and M B = 20 , C B = 10 . (a) Draw the Edgeworth Box. (b) What the marginal rates of substitution for each person? Solution : MRS A = C A M A , MRS B = C B M B . (c) What is the contract curve for this exchange economy? Solution : At points on the contract curve, C A M A = C B M B = 30 C A 30 M A M A = C A and M B = 30 M A , C B = 30 C A (d) What is the core for this exchange economy? Solution : At the core, M A C A ± 10 (20) = 200 C 2 A ± 200 C A ± p 200 Also, M 1 2 B C 1 2 B ± (20) 1 2 (10) 1 2 M B C B ± 200 (30 M A ) (30 C A ) ± 200 (30 C A ) 2 ± 200 30 C A ± p 200 C A ² 30 p 200 So the core is given by all points on the contract curve where p 200 ² C A ² 30 p 200 . 1
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Econ100B PS6 Solutions - ECO 100B Problem Set 6 Answers...

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