Quiz 11 Exchange2 ANS

# Quiz 11 Exchange2 ANS - Shomu Banerjee ECON 201 ya xb...

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Shomu Banerjee ECON 201 EXCHANGE #2 ANSWERS x a x b y b O b O a y a 20 10 30 10 20 40 50 E In the Edgeworth box above, Andrea‘s origin is O a while Beverly’s is O b . Andrea’s endowment is (10, 20) and Beverly’s is (50, 10). They have identical utility functions u ( x , y ) = xy 2 with marginal utilities MU x = y 2 and MU y = 2 xy . Denote each person’s consumption bundle by ( x a , y a ) and ( x b , y b ) where x a + x b = 60 and y a + y b = 30. (a) Calculate and draw the points of the contract curve that lie within the Edgeworth box. Set MRS a = MRS b : y a 2 2 x a y a = y b 2 2 x b y b or y a x a = y b x b . Substitute y b = 30 - y a and x b = 60 – x a and simplify to get y a = x a /2. The contract curve therefore is a straight line from O a to O b .

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(b) Andrea and Beverly decide to trade. Assume that the price of good x is p x = 1. The demand for
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Quiz 11 Exchange2 ANS - Shomu Banerjee ECON 201 ya xb...

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