Quiz 21. Consumption externality

Quiz 21. Consumption externality - x a and y a . But x b...

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Shomu Banerjee ECON 201 CONSUMPTION EXTERNALITY Suppose Atkins and Bodkins are the only two consumers in our economy, there are two goods x and y , and Atkins’ endowment is ω a = (10, 0) while Bodkins’ is ω b = (0, 10). Their utility functions are given by u A ( x a , y a , x b ) = x a y a + x b and u B ( x b , y b ) = x b y b . Bodkins’ preferences are Cobb-Douglas. Atkins’ preferences are Cobb-Douglas in his own consumption of
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Unformatted text preview: x a and y a . But x b also enters A ’s utility function as a ‘good’; Atkins has no part in choosing x b but derives a positive utility from Bodkins’ consumption of it. The (private) marginal rates of substitution for Atkins and Bodkins are -y a / x a and -y b / x b . Find the contract curve for this two-person Edgeworth box. x a x b y a y b O b O a 5 5 10 10...
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This note was uploaded on 10/26/2010 for the course ECONOMICS ECON 201 taught by Professor Dr.shomubanerjee during the Summer '07 term at Emory.

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