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Microeconomic Theory II pb3

Microeconomic Theory II pb3 - b Draw the indifference...

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Microeconomic Theory II Problem Set 3 Question 1 Tony Almeida and Michelle Dessler are dispatched from the Counter Terrorist Unit (CTU) on a secret mission to infiltrate a mafia gang who plots to obtain biological weapon from the black market. To ensure Tony and Michelle’s survival, the CTU issues each of them a survival kit. Each kit consists of (1) 10 bottles of energy drink and (2) 5 packs of energy bar. Tony likes the energy drink but is indifferent toward the energy bar. For Michelle, her utility function is U M = D+ 5B where D is the amount of energy drinks and B is the amount of energy bar she consumes. a) Construct an Edgeworth box diagram of this economy
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Unformatted text preview: b) Draw the indifference curves of Tony and Michelle that pass through their initial endowment c) Is there any gain from trade? d) Find the Pareto optimal allocation of this economy Question 2 Consider an economy with 3 goods ( x 1 , x 2 , and x 3 ) and the excess demand function for good 2 and 3 are as follow: 2 2 4 1 2 3 1 3 1 2 3 1 3 1 2 2--=-+-= p p p p z p p p p z a) Find the excess demand function of good1 b) If we set the price of good 1 as a numeraire, calculate the Walrasian equilibrium of this economy c) Verify that the prices in (b) clear all three markets...
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