Consider an exchange economy with two consumers (A and B) and two goods (1 and 2)....

  

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Consider an exchange economy with two consumers (A and B) and two goods (1 and 2). Consumer A has 60 units of good 1 and 40 units of good 2, consumer B has 40 units of good 1 1 and 60 units of good 2. Consumer A's utility function is given by Uª = (y^) · (y^)³ and 2 1 consumer B's utility function is given by U³ = (y)³ · (y2)³, where y and y are consumer A's final consumption, and y? and y2 are consumer B's final consumption. A. Is it Pareto efficient if each consumer consumes just his or her initial endowment? Explain your answer. Suppose that the government steps in to make consumer A give 10 units of good 1 to consumer B and consumer B give 10 units of good 2 to consumer A. Does this government's intervention improve allocative efficiency? Explain your answer using a graph. Instead of the government's intervention, suppose that the consumers voluntarily trade each other. Can this voluntary trading be better for the consumers than the government's intervention? Explain your answer. B. Given that both consumers are fully rational, suppose that consumer A consumes 40 units of good 1 (y 40) after directly (i.e., no market) trading with consumer B. How many units of good 2 does each consumer consume? Instead of direct trading, the consumers trade each other in a competitive market. Can the competitive market allow the consumers consume the same bundles as under the direct trading you identified above? If so, what is the relative = P₁ price of goods in equilibrium? Can the competitive market trading be better for the P2 consumers than the direct trading? Explain all your answers. Consider an exchange economy with two consumers (A and B) and two goods (1 and 2). Consumer A has 60 units of good 1 and 40 units of good 2, consumer B has 40 units of good 1 1 and 60 units of good 2. Consumer A's utility function is given by Uª = (y^) · (y^)³ and 2 1 consumer B's utility function is given by U³ = (y)³ · (y2)³, where y and y are consumer A's final consumption, and y? and y2 are consumer B's final consumption. A. Is it Pareto efficient if each consumer consumes just his or her initial endowment? Explain your answer. Suppose that the government steps in to make consumer A give 10 units of good 1 to consumer B and consumer B give 10 units of good 2 to consumer A. Does this government's intervention improve allocative efficiency? Explain your answer using a graph. Instead of the government's intervention, suppose that the consumers voluntarily trade each other. Can this voluntary trading be better for the consumers than the government's intervention? Explain your answer. B. Given that both consumers are fully rational, suppose that consumer A consumes 40 units of good 1 (y 40) after directly (i.e., no market) trading with consumer B. How many units of good 2 does each consumer consume? Instead of direct trading, the consumers trade each other in a competitive market. Can the competitive market allow the consumers consume the same bundles as under the direct trading you identified above? If so, what is the relative = P₁ price of goods in equilibrium? Can the competitive market trading be better for the P2 consumers than the direct trading? Explain all your answers.

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The question asks to examine different scenarios regarding trade and efficiency between two consumers in an exchange economy Lets address each part of the question A Is it Pareto efficient if each con... View the full answer