ps5fall2000_201 - 14.03 Problem Set #5 Fall 2000 Due Class...

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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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ps5fall2000_201 - 14.03 Problem Set #5 Fall 2000 Due Class...

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