QUESTION B2 [30 marks] Two housemates (Agata and Belinda) consume two types of pastries (Croissants and...

 

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QUESTION B2 [30 marks] Two housemates (Agata and Belinda) consume two types of pastries (Croissants and Danish pastries). Agata begins with 4 croissants and 2 danishes. Belinda begins with 5 croissants and 4 danishes. Both Agata and Belinda have Cobb-Douglas utility functions over these goods. 12 For Agata, U(c,d) = cd whilst for Belinda, U(cg, dg) = c dz. In these equations, c, d are the numbers of croissants and danishes consumed by Agata, and CB, dg are the numbers of croissants and danishes consumed by Belinda. Agata and Belinda exchange their pastries. Assume there are no outside options for trade. a) (10 marks) Draw an Edgeworth Box diagram that describes this situation. Show the endowment point. i. What level of utility does Agata enjoy at the endowment? ii. What level of utility does Belinda enjoy at the endowment? III. Add indifference curves for each of them. iv. Highlight the lens and the Pareto set in your diagram and explain what they mean. b) (6 marks) State the feasibility and Pareto optimality conditions for equilibrium in the Edgeworth box. Derive the MRS between CDs and DVDs for Agata and Belinda. c) (6 marks) What are the budget constraints for Agata and Belinda? Find the equilibrium prices and quantities for this economy. d) (8 marks) Describe the Walras' law and its implications. QUESTION B2 [30 marks] Two housemates (Agata and Belinda) consume two types of pastries (Croissants and Danish pastries). Agata begins with 4 croissants and 2 danishes. Belinda begins with 5 croissants and 4 danishes. Both Agata and Belinda have Cobb-Douglas utility functions over these goods. 12 For Agata, U(c,d) = cd whilst for Belinda, U(cg, dg) = c dz. In these equations, c, d are the numbers of croissants and danishes consumed by Agata, and CB, dg are the numbers of croissants and danishes consumed by Belinda. Agata and Belinda exchange their pastries. Assume there are no outside options for trade. a) (10 marks) Draw an Edgeworth Box diagram that describes this situation. Show the endowment point. i. What level of utility does Agata enjoy at the endowment? ii. What level of utility does Belinda enjoy at the endowment? III. Add indifference curves for each of them. iv. Highlight the lens and the Pareto set in your diagram and explain what they mean. b) (6 marks) State the feasibility and Pareto optimality conditions for equilibrium in the Edgeworth box. Derive the MRS between CDs and DVDs for Agata and Belinda. c) (6 marks) What are the budget constraints for Agata and Belinda? Find the equilibrium prices and quantities for this economy. d) (8 marks) Describe the Walras' law and its implications.

Answer rating: 100% (QA)

a U Ve UB 6 UA at at ya da CA 54 2 VA endowment 4 42 34 14 238 ... View the full answer