4. [20 marks] Avi (A) and Brad (B) live in an exchange economy where they consume...
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4. [20 marks] Avi (A) and Brad (B) live in an exchange economy where they consume cakes, x, and litres of beer, y. Both of their preferences are given by: u= aln(x) + (1 - a) ln(y) where 0 < a < 1. There are a total of n cakes and 3n litres of beer in the economy, where 3 > 0. a. Assuming Py = 1 and letting pr=p, show that there will be a constant equilibrium price, p* (a, 3), regardless of the initial distribution of x and y between Avi and Brad. What is this price? b. Consider a beer-heavy economy in which n = 10, a = 0.2 and 3= 8. Suppose Avi starts with all the beer, and Brad starts with all the cake. What will be the post-trade equilibrium? Who trades how much for what? Show the situation on an Edgeworth-box diagram with post-trade indifference curves. (Your diagram does not have to be 'to scale".) 4. [20 marks] Avi (A) and Brad (B) live in an exchange economy where they consume cakes, x, and litres of beer, y. Both of their preferences are given by: u= aln(x) + (1 - a) ln(y) where 0 < a < 1. There are a total of n cakes and 3n litres of beer in the economy, where 3 > 0. a. Assuming Py = 1 and letting pr=p, show that there will be a constant equilibrium price, p* (a, 3), regardless of the initial distribution of x and y between Avi and Brad. What is this price? b. Consider a beer-heavy economy in which n = 10, a = 0.2 and 3= 8. Suppose Avi starts with all the beer, and Brad starts with all the cake. What will be the post-trade equilibrium? Who trades how much for what? Show the situation on an Edgeworth-box diagram with post-trade indifference curves. (Your diagram does not have to be 'to scale".)
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Related Book For
Probability and Random Processes With Applications to Signal Processing and Communications
ISBN: 978-0123869814
2nd edition
Authors: Scott Miller, Donald Childers
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