Consider an Edgeworth Economy with two consumers A and B, and two goods 1 and 2....

 

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Consider an Edgeworth Economy with two consumers A and B, and two goods 1 and 2. The initial endowments are E₁ = 6 and E₂ = 6, and the initial endowments are |e4 = 6, e4 = 0, e² = 0, and e² = 6. In words, A holds the entire endowment of good 1, and B holds the entire endowment of good 2. u²(x₁, x₂) = x1x2, and the utility function of consumer B is u³ (y₁, 92) = √₁ + √√2- (a) Draw the Edgeworth Box that shows the initial endowments on it. P2 = (b) Verify that the price ratio ₁ = 1 and x₁ = x₂ = y₁ = y₂ = 3 is an equilibrium. Hint: You do not need to derive the equilibrium from scratch. You can just show that given the price ratio 1, both consumers maximize utility when consuming 3 units of each good, and that this allocation is feasible. Alternatively, you can just show that the allocation satisfies the MRSA = MRSB and the feasibility conditions. P2 Consider an Edgeworth Economy with two consumers A and B, and two goods 1 and 2. The initial endowments are E₁ = 6 and E₂ = 6, and the initial endowments are |e4 = 6, e4 = 0, e² = 0, and e² = 6. In words, A holds the entire endowment of good 1, and B holds the entire endowment of good 2. u²(x₁, x₂) = x1x2, and the utility function of consumer B is u³ (y₁, 92) = √₁ + √√2- (a) Draw the Edgeworth Box that shows the initial endowments on it. P2 = (b) Verify that the price ratio ₁ = 1 and x₁ = x₂ = y₁ = y₂ = 3 is an equilibrium. Hint: You do not need to derive the equilibrium from scratch. You can just show that given the price ratio 1, both consumers maximize utility when consuming 3 units of each good, and that this allocation is feasible. Alternatively, you can just show that the allocation satisfies the MRSA = MRSB and the feasibility conditions. P2

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a Below is the Edgeworth Box diagram showing the initial endowments A diagram is shown with the foll... View the full answer