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Unformatted text preview: Econ 302- Solution to the third Problem Set Spring 2011-Ali Toossi Due: Wednesday, February 16 Efficiency: 1. The only allocation that is Pareto efficient is that in which person 1 has all the apples and person 2 has all the bananas. For any other allocation, one of the persons has some units of the good she does not like, and would be better off if the other person had those units. 2. a. No. Suppose person 1 has some bananas and person 2 has some apples. Then by transferring one banana from person 1 to person 2 and one apple from person 2 to person 1 we make both of them better off. b. Yes. Every person has the fruit it values most. By transferring both will be worse off. c. Yes. Any transfer makes person 1 worse off. d. Yes. Any transfer makes person 2 worse off. Competitive market: The equilibrium is efficient 3. a. Supply & Demand 1 2 3 4 5 6 7 8-1 1 2 3 quantity price S P 1 b. For any 3 < P <4, X sells to A. and Y keeps the good. So the equilibrium quantity is 1. c. Payoffs are as follows: X, $1; Y, $4; A, $6; B, $6. d. Payoffs are as follows: X, $3.5; Y, $4; A, $8.5; B, $6. e. Suppose equilibrium price is 3 + a , where 0 < a <1. Then the payoffs are as follows: X, $3 + a ; Y, $4; A,$9- a ; B, $6. For any value of a the allocation is efficient, because if you change the value of a , X will be better off and worse off f. Payoffs are as follows: X, $3; Y, $4; A, $8; B, $6. This is not Pareto efficient. Because moving to allocation in part (d) will make both X & A better off without hurting Y & B.moving to allocation in part (d) will make both X & A better off without hurting Y & B....
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This note was uploaded on 02/27/2011 for the course ECON 302 taught by Professor Avrin-rad during the Spring '09 term at University of Illinois, Urbana Champaign.
- Spring '09