An economy is made up of two people. The utility functions are: u(x1) = x11x12 and...

 

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An economy is made up of two people. The utility functions are: u₁(x1) = x11x12 and u₂(x) = 2x21 + 2x22 - 11. The initial bundles are: W₁ = (1,0) W2 = (0, 1) Although 2 suffers from 1's consumption of good 1, he cannot control it, nor does he realize that the total quantity of good 1 available is 1. a. Calculate a competitive equilibrium from w. Draw an Edgeworth box diagram to illustrate your answer. b. Find the locus of interior Pareto optimal points. c. Calculate prices p₁ and p2, a per-unit subsidy s or tax t, and lump sum cash transfers T₁ and T2 to bring the economy to the allocation 31 = (1/3,1/2),y2 = (2/3,1/2). An economy is made up of two people. The utility functions are: u₁(x1) = x11x12 and u₂(x) = 2x21 + 2x22 - 11. The initial bundles are: W₁ = (1,0) W2 = (0, 1) Although 2 suffers from 1's consumption of good 1, he cannot control it, nor does he realize that the total quantity of good 1 available is 1. a. Calculate a competitive equilibrium from w. Draw an Edgeworth box diagram to illustrate your answer. b. Find the locus of interior Pareto optimal points. c. Calculate prices p₁ and p2, a per-unit subsidy s or tax t, and lump sum cash transfers T₁ and T2 to bring the economy to the allocation 31 = (1/3,1/2),y2 = (2/3,1/2).

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a The competitive equilibrium from w can be found by solving the following s... View the full answer