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310-2-final-answers - Economics 310-2 Spring 2007 Professor...

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Economics 310-2 Spring 2007 Professor Jeff Ely Final Exam Instructions: There are three questions with equal weight. You have 2 hours to complete the exam. Please remember that your explanations are at least as important as the answers you give. Explain your answers carefully. 1. ( 10 points ) This question is about a two-person pure-exchange economy. There are two goods, G and B and consumers 1 and 2 have endowments ( e G 1 , e B 1 ) and ( e G 2 , e B 2 ) respectively, where e G i and e B i indicate the quantities of G and B initially held by consumer i . (a) (2 points) Define a feasible allocation. A pair of bundles such that the total quantity of the two goods across the two bundles is equal to the total quantity in the endowment. (b) (4 points) State precisely what it means for a feasible allocation to be Pareto efficient. A second allocation pareto dominates the first if neither consumer strictly prefers the first to the second and at least one consumer strictly prefers the secod to the first. A feasible allocation is pareto efficient if no other feasible allocation pareto dominates it. (c) (4 points) Assume that both consumers preferences have the following property: good B is in fact a “bad” in that more of good B lowers the consumer’s utility (units of B cannot be simply disposed of, they inevitably lower to utility of whomever obtains them.) Good G on the other hand is a traditional good in that more of good G raises the consumer’s utility. Assess the following logic: Every feasible allocation is Pareto efficient. The reason is that it
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