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Unformatted text preview: Bluebook 21 out of 50 pts. (2 qns., 10 pts. each + 1) Answer these questions in your bluebook. Show your work and intermediate steps for partial credit. Points are split equally across parts. Your score will only be based on the marks in your bluebook. You will not receive any credit for anything written on your exam paper. You will receive 1 extra point for correctly writing your name, perm number, version (A,B,C, or D), and TAs name on your bluebook. 1. Consider an exchange economy consisting of two people, A and B , endowed with two goods, 1 and 2. Person A is initially endowed with A = (4 , 8) and person B is initially endowed with B = (4 , 0). Their preferences are given by U A ( x 1 ,x 2 ) = x 1 x 2 and U B ( x 1 ,x 2 ) = x 2 1 x 2 2 . (a) Write the equation of the contract curve (express x A 2 as a function of x A 1 ). Answer : x A 2 = x A 1 (b) Let p 2 = 1. Find the competitive equilibrium price, p 1 , and allocations, x A = ( x A 1 ,x A 2 ) and x B = ( x B 1 ,x B 2 ). Answer : p 1 = 1, x A = (6 , 6), and x B = (2 , 2) (c) Now suppose that person B s preferences are instead given by U B ( x 1 ,x 2 ) = min { x 1 ,x 2 } . Given a price of p 1 = 1 3 (and assuming p 2 = 1), what Paretooptimal allocation will result from trade between the two people?...
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This note was uploaded on 05/08/2011 for the course ECON 100B taught by Professor Kilenthong during the Spring '08 term at UCSB.
 Spring '08
 KILENTHONG

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