Two consumers a and b face the following utility maximization problems Max U a = In x
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Question:
Two consumers a and b face the following utility maximization problems
Max U a = In x a + In y a
s.t, p x x a + p y (y a )y a = I a
Max U b = In x b + In y b
s.t, p x x b + p y y b = I b
where x and y are goods the price of which are p x (x a ) and p y and where I a , I b are the consumers incomes.
(a) Using the method of Lagrange derive equations characterizing the consumers optima.
(b) Show that the market fails to achieve consumption efficiency here.
Related Book For
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
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