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HW8solution

# HW8solution - Homework 8 Solutions Q1.a The indierence...

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Homework 8 - Solutions Q1.a The indi/erence curves will be straight lines, the ones of S with a slope of ° 2 and the ones of G with a slope of ° 1 2 : The picture is (almost) the same as in the notes, p. 54. Q1.b The MRS of G of o vs b is ° 1 2 , the one of S is ° 2 : Hence, at each point ( b; o ) G values an additional unit of o twice as much as he values an additional unit of b and S values an additional unit of b twice as much as he values an additional unit of o: Therefore the pareto e/cient allocations will be the upper and left edge of the box, just as in the notes on p: 55. Q.1.c Let w G be the wealth of G; i.e. w G = p b ± 5 + p s ± 5 and w S the wealth of S: Appealing to Walras°Law, let p b = 1 for simplicity. Since G 0 s preferences are linear, his demand will be o g 8 < : = 0 if p o > 2 2 [0 ; w g p o ] if p o = 2 = w g p o if p o < 2 ; b g 8 < : = w g p b if p o > 2 2 [0 ; w g p b ] if p o = 2 = 0 if p o < 2 where in the case that p o = 2 we need that p o o g + p b b g = w g ; i.e. G exhausts his budget. S has the same

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HW8solution - Homework 8 Solutions Q1.a The indierence...

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