HW13_addendum-1 - < 40 units of good 2, which is also a...

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Intermediate Microeconomics, 2008 PS 13: Addendum Q1(f) The solution posted earlier for Q1(f) was incomplete. The equilibrium described is correct if A 1 B . However, there are other equilibria if A > B > 1 or 1 > A > B . First suppose A > B > 1 and let p = B . At this price, agent A would sell all of her endowment of good 2 and get 20 p +20 p < 40 units of good 1, which is in fact a feasible allocation. Since p = B = MRS B , agent B is indiﬀerent between all the bundles on his budget line, so this is an optimal choice for him. Therefore, this is, in fact, a competitive equilibrium. Now suppose 1 > A > B and let p = A . At this price, agent B would sell all of his endowment of good 1 and get 20 p + 20
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Unformatted text preview: < 40 units of good 2, which is also a feasible allocation. Since p = A = MRS A , agent A is indiﬀerent between all the bundles on her budget line, so this is an optimal choice for her. Therefore, this is, in fact, another competitive equilibrium. This problem turned out to be quite involved and, therefore, would be above and beyond what you might be asked on the exam. However, there is an important point to be taken away from this problem: Since competitive equilibria can occur at corner solutions, it is not necessarily true that both agents’ MRS’s are the same at a competitive equilibrium allocation. 1...
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This note was uploaded on 12/10/2011 for the course ECON 401 taught by Professor Burbidge,john during the Winter '08 term at Waterloo.

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