(A) Consider a pure exchange economy with two agents A and B and two commodities X...

 

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(A) Consider a pure exchange economy with two agents A and B and two commodities X and Y. The total endowments of X and Y are 10 units each. The utility functions of the two agents are:U₁(xª, yª) = xªyª,Ug(x, y) = xByB. Consider the allocation xA=xB = yA = y³ = 5. Show that this is a Pareto efficient allocation. Elucidate with the help of a diagram. Can this be a competitive equilibrium if endowments are A = (1,3), B = (9,7)? If not find a lump sum redistribution of good X which will make the above allocation a competitive equilibrium. Which property of preferences makes the result in part (ii) possible? (i) (ii) (iii) (B) Explain the implications of the Second Theorem of Welfare Economics for the taxation policy of a competetive economy. (A) Consider a pure exchange economy with two agents A and B and two commodities X and Y. The total endowments of X and Y are 10 units each. The utility functions of the two agents are:U₁(xª, yª) = xªyª,Ug(x, y) = xByB. Consider the allocation xA=xB = yA = y³ = 5. Show that this is a Pareto efficient allocation. Elucidate with the help of a diagram. Can this be a competitive equilibrium if endowments are A = (1,3), B = (9,7)? If not find a lump sum redistribution of good X which will make the above allocation a competitive equilibrium. Which property of preferences makes the result in part (ii) possible? (i) (ii) (iii) (B) Explain the implications of the Second Theorem of Welfare Economics for the taxation policy of a competetive economy.

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A i To determine if the allocation xA xB yA yB 5 is Pareto efficient we need to check if there is no alternative allocation that can make at least one agent better off without making the other agent w... View the full answer