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14.03 Problem Set #5 Fall 2000
Due Class #17
Theory
1. Nicholson 15.1, 15.5, 15.8, 16.2, 17.5, 17.6
2.
A popular children’s nursery rhyme reads, “Jack Sprat can eat no fat and his wife can eat no
lean.” Construct an Edgeworth Box diagram for Mr. and Ms. Sprat with appropriately labeled
axes. Draw their indifference curves and show the set of Pareto optimal allocations. What is
the competitive equilibrium allocation? Explain.
3. Suppose that a country (Home) has identical consumers with utility functions
U(X,Y)
=
X
0.5
Y
0.5
. The production possibility frontier (PPF) is given by
X
2
+
2
Y
2
=
128.
For each of these parts, illustrate your result graphically.
(a) Solve for the competitive equilibrium in a closed economy. That is, suppose that
consumers and producers take prices as given and maximize utility and profits. What
price ratio is such that supply equals demand? Briefly explain why this is efficient.
(b) Suppose that the country is small and can trade with the rest of the world (ROW) at price
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 Spring '10
 çAKMAK
 Microeconomics

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