An economy has two types of people. The utility function of Type 1 is U(x, y) = x+ y, and that of Type 2 is U(x, y)= Min (2x, y). Type 1 initially has 8 units of good X only (no good Y), and Type 2 has 2 units of good X and 10 units of good Y. a) Show this economy in an Edgeworth box, and draw the contract curve (i.e the set of Pareto efficient allocations). b) Find the competitive equilibrium prices and consumptions for each type of person. c) Is the competitive equilibrium allocation you found in b) Pareto efficient? Why or why not?

An economy has two types of people. The utility function of Type 1 is U(x, y) = x+ y, and that of Type 2 is U(x, y)= Min (2x, y). Type 1 initially has 8 units of good X only (no good Y), and Type 2 has 2 units of good X and 10 units of good Y. a) Show this economy in an Edgeworth box, and draw the contract curve (i.e the set of Pareto efficient allocations). b) Find the competitive equilibrium prices and consumptions for each type of person. c) Is the competitive equilibrium allocation you found in b) Pareto efficient? Why or why not?

Micro Economics For Today

10th Edition

ISBN:9781337613064

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter6: Consumer Choice Theory

Section: Chapter Questions

Problem 14SQ

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