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Unformatted text preview: Problem Set 6 — Competitive Equilibrium Instructor: Todd Sarver Econ 310-2, Fall 2011 TA: Guannan Luo (Any email questions regarding this PS should be sent to this TA.) Complete all problems and explain your answers carefully. This problem set is due on Thursday, November 17 at 4:45pm in the mailbox labeled Todd Sarver in the Economics Department main office (302 Andersen Hall). At the top of your assignment, please include the TA whose discussion session you attend (Guannan, Robert, Esteban) and the day that you attend (Monday, Friday). 1 Competitive Equilibrium Consider an economy with two consumers, 1 and 2, and two goods, x and y . Suppose the consumers’ utility functions and endowments are as follows: u 1 ( x 1 ,y 1 ) = ln( x 1 ) + ln( y 1 ) e x 1 = 4 , e y 1 = 2 u 2 ( x 2 ,y 2 ) = 2ln( x 2 ) + 3ln( y 2 ) e x 2 = 5 , e y 2 = 5 (a) Solve for the demand functions for consumers 1 and 2. (b) Verify that these demand functions satisfy Walras’ law. (c) Solve for the market-clearing prices. (d) Substitute the equilibrium prices back into the demand functions to find the equilibrium quantities. (e) Draw an Edgeworth box for this economy. Be sure to carefully label your graph and indicate its dimensions. Draw the endowment allocation, the equilibrium allocation, and the budget line for the equilibrium prices in your box. Draw indifference curves for the two consumersline for the equilibrium prices in your box....
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This note was uploaded on 01/03/2012 for the course ECON 310-2 taught by Professor Sarver during the Spring '08 term at Northwestern.
- Spring '08