Question 5: Consider the exchange economy of Nirvana, which consists of two people, A and B....

 

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Question 5: Consider the exchange economy of Nirvana, which consists of two people, A and B. Two goods are available for consumption, wine and chocolate. The endowment of the economy is 64 units of wine and 16 units of chocolate: A's endowment is W*A and C*A, while B's endowment is WB and CB. The utility functions for each individual are: UA = 2(WAC)0.5 and UB= 10(WBCB)05, where W, and C, are the amounts of wine and chocolate consumed by individual j. BE Careful, in that endowment values are starred, but consumption values are not! The marginal utilities for each good for each individual are: MU^W = (CA/W); MUA (W/C05; MUBw = 5(CB/WB)05; and, MUB= 5(WB/CB) 0.5 = Let BA and B represent the money income of individuals A and B. Let Pc and Pw represent the price of chocolate and the price of wine A. Why is it permissible to set Pc equal to 1 when solving for the competitive general equilibrium? Verify Walras' Law. B. Suppose that W* = 48 and C'A= 8. Let Pc = 1. Find the competitive general equilibrium price of wine, the consumption bundles for each person, and the amount of each good bought or sold. Indicate the endowment point, the competitive allocation, and the price line in your Edgeworth Box. Indicate the point on the utilities possibility frontier which corresponds to the competitive general equilibrium. C. Verify the First Fundamental Theorem of Welfare Economics. Question 5: Consider the exchange economy of Nirvana, which consists of two people, A and B. Two goods are available for consumption, wine and chocolate. The endowment of the economy is 64 units of wine and 16 units of chocolate: A's endowment is W*A and C*A, while B's endowment is WB and CB. The utility functions for each individual are: UA = 2(WAC)0.5 and UB= 10(WBCB)05, where W, and C, are the amounts of wine and chocolate consumed by individual j. BE Careful, in that endowment values are starred, but consumption values are not! The marginal utilities for each good for each individual are: MU^W = (CA/W); MUA (W/C05; MUBw = 5(CB/WB)05; and, MUB= 5(WB/CB) 0.5 = Let BA and B represent the money income of individuals A and B. Let Pc and Pw represent the price of chocolate and the price of wine A. Why is it permissible to set Pc equal to 1 when solving for the competitive general equilibrium? Verify Walras' Law. B. Suppose that W* = 48 and C'A= 8. Let Pc = 1. Find the competitive general equilibrium price of wine, the consumption bundles for each person, and the amount of each good bought or sold. Indicate the endowment point, the competitive allocation, and the price line in your Edgeworth Box. Indicate the point on the utilities possibility frontier which corresponds to the competitive general equilibrium. C. Verify the First Fundamental Theorem of Welfare Economics.

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A It is permissible to set the price of chocolate Pe equal to 1 when solving for the competitive general equilibrium because relative prices are what ... View the full answer