Problem_Set_05

Problem_Set_05 - Economics 1100: Intermediate...

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Economics 1100: Intermediate Microeconomics Spring 2011 Problem Set 5 – part 1 This Homework is due Monday, March 14th, at the beginning of class . This is only the first part. I will upload a second part to this homework during the weekend. 1. Adrienne and Stephen consume pizza, Z, and cola, C. Adrienne’s utility function is U A =Z A C A , and Stephen’s is U S =Z S 0.5 C S 0.5 . Their endowments are Z A =10, C A =20, Z S =20, and C S =10. a. Compute the set of Pareto optimal allocations (also known as contract curve). b. Compute the competitive equilibrium for this exchange economy when the price of pizza is 1. c. Draw the Edgeworth box describing the equilibrium and the Pareto optimal allocation. 2. Suppose that all iPod owners consider only two options for downloading music to their MP3 players: purchasing songs from iTunes or copying songs from friends’ CDs. With these two options, suppose the weekly inverse market demand for the Rolling Stones’ song “Satisfaction” is
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