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Unformatted text preview: Economics 310-2 Spring 2009 Professor Jeff Ely Problem Set 8 Due Mon June 1 1. Consider a pure-exchange economy consisting of two consumers, George and Saddam, and two goods, beer ( b ) and oil ( o ). Initially, each consumer is endowed with 5 gallons of beer and 5 barrels of oil. George has utility function u G ( b, o ) = b + 2 o and Saddam has utility function u S ( b, o ) = 2 b + o. (a) Draw an Edgeworth box diagram for this economy. Label the axes and the dimensions of the box. Indicate the initial allocation and draw each consumers indifference curve through the initial allocation. (b) Identify on your diagram the set of all Pareto efficient allocations. (c) Suppose each good has a market price of 1. Illustrate on your diagram the bundles demanded by each consumer. Is this a competitive equilibrium? 2. Zaley and Iris have Legos and crayons. Zaley has 5 Legos and 5 crayons, Iris has 2 Legos and 8 crayons. Zaleys utility function for Legos and crayons is u z ( l z , c z ) = l z...
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