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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....
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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.
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