ECON201B 2006 PS2 - Economics 201B 2nd Half - Spring 2006...

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Problem Set 2 Economics 201B 2nd Half - Spring 2006 Due Thursday, 6 April in Lecture 1. Consider an economy consisting of two goods, one agent of type a , and ten agents of type b . The type a agent has utility given by U a ( x 1 a ; x 2 a ) = x 1 a x 2 a and an endowment w a = (20 ; 10) . Each type b agent has utility given by U b ( x 1 b ; x 2 b ) = x 1 b x 2 b and an endowment w b = (1 ; 2) . (a) Find the competitive equilibrium prices and allocations in this economy. Is this allocation Pareto Optimal? (b) Competitive equilibrium should seem to you to be an unreasonable market allo- cation concept in this particular economy. Why? (c) Assume that all type b agents are price-takers, and that the type a agent acts as a monopolist. What are the market prices and allocations in the non-competitive equilibrium? Is the ratio p 1 p 2 greater than, less than, or the same as that in part (a)? What is the intution for this? (even if you cannot compute p 1 p 2 for this market, argue qualitatively what you might expect it to be)
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This note was uploaded on 08/01/2008 for the course ECON 201B taught by Professor Anderson during the Spring '06 term at University of California, Berkeley.

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ECON201B 2006 PS2 - Economics 201B 2nd Half - Spring 2006...

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