Person A and B both have Cobb-Douglas preferences, u_A = (x¹_A)^2/5 · (x²_A)^3/5and u_B = x¹_B · x²_B . Their endowments are w_A = (0, 2) and w_B = (4, 0). Find their demand functions and use market clearing to derive equilibrium price for good two, p₂ (set p₁=1, and enter your answer as a simplified decimal).

Solve for the contract curve for the setting described in question 1.). 

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To find the demand functions for Person A and Person B and derive the equilibrium price for good two ... View the full answer