W11_final_Free-response answers

W11_final_Free-response answers - Blue-book 21 out of 50...

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Unformatted text preview: Blue-book 21 out of 50 pts. (2 qns., 10 pts. each + 1) Answer these questions in your blue-book. 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 blue-book. 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 blue-book. 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 Pareto-optimal 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.

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W11_final_Free-response answers - Blue-book 21 out of 50...

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