MT2answer420KSpring08

MT2answer420KSpring08 - MT2 answer, Spring 08 Part 1 Q1 :...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: MT2 answer, Spring 08 Part 1 Q1 : (d) Q2 : (c) Q3 : (a) Q4 : (b) Q5 : (a) Q6 : (a) Q7 : (d) Q8 : (c) Q9 : (b) Q10 : (e) Q11 : (c) Q12 : (e) Q13 : (d) Part 2 Q1 : (i) Notice that if A’s consumption is perfectly insured, denoted by ( c,c ) let’s say, then B’s allocation is perfectly insured as well, which is given by (10- c, 10- c ). Let πv A ( x A 1 ) + (1- π ) v A ( x A 2 ) be the representation of A’s preference in the ex- pected utility form, and πv B ( x B 1 ) + (1- π ) v B ( x B 2 ) be the representation of B’s preference, where π denotes the probability of state 1. Then, at any allocation like above, MRS A = πv A ( c ) πv A ( c ) = π 1- π MRS B = πv B (10- c ) πv B (10- c ) = π 1- π Hence A and B have equal MRS, and the allocation is Pareto efficient. (ii) Since π = 1 3 , π 1- π = 1 2 , which corresponds to the equilibrium price ratio. Thus p 1 p 2 = 1 2 . The allocation is obtained by taking the intersection of the line with slope- 1 2 that passes though the endowment point and the certainty line. Letthat passes though the endowment point and the certainty line....
View Full Document

This note was uploaded on 10/25/2010 for the course ECO 420K taught by Professor D during the Spring '10 term at University of Texas.

Page1 / 3

MT2answer420KSpring08 - MT2 answer, Spring 08 Part 1 Q1 :...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online