Question: Please answer clearly! Long Problem 2: General Equilibrium in an Exchange Economy (38 points) Romeo's preferences for pizza (good 1) and wine (good 2) are

Please answer clearly! Long Problem 2: General Equilibrium in an Exchange Economy (38 points) Romeo's preferences for pizza (good 1) and wine (good 2) are represented by the utility function uR(XR, 2) = 272. Juliet's utility function is given by u"(21,2) RR %= zz. Romeo's initial endowment

Please answer clearly!

Long Problem 2: General Equilibrium in an Exchange Economy (38 points) Romeo's preferences for pizza (good 1) and wine (good 2) are represented by the utility function uR(XR, 2) = 272. Juliet's utility function is given by u"(21,2) RR %= zz. Romeo's initial endowment consists of 3 pizzas and 1 bottles of wine whereas Juliet's initial endowment consists of 7 pizzas and 9 bottles of wine. (c) (8 points) Assume that both individuals are price takers and that they face mar- ket prices p for pizza and p2 for wine. What are the market values of Romeo's and Juliet's endowments? Write down the budget constraints for each consumer. State both consumers' utility maximization problems and solve them. (Hint: Given Romeo's and Juliet's identical preferences, they will have identical tangency con- ditions for optimal consumer choice but different budget constraints.) Derive both consumers' demands for pizza and wine as functions of market prices P1 and 22. (d) (7 points) State the market clearing conditions for any one of the markets in this economy. Using your results from (C), find the equilibrium price ratio between pizza and wine. Explain why it is not necessary to consider the other market. (e) (7 points) Calculate the equilibrium allocations. Is the market equilibrium found in (d) and (e) Pareto-efficient? Why or why not? Illustrate your answer graphically. Long Problem 2: General Equilibrium in an Exchange Economy (38 points) Romeo's preferences for pizza (good 1) and wine (good 2) are represented by the utility function uR(XR, 2) = 272. Juliet's utility function is given by u"(21,2) RR %= zz. Romeo's initial endowment consists of 3 pizzas and 1 bottles of wine whereas Juliet's initial endowment consists of 7 pizzas and 9 bottles of wine. (c) (8 points) Assume that both individuals are price takers and that they face mar- ket prices p for pizza and p2 for wine. What are the market values of Romeo's and Juliet's endowments? Write down the budget constraints for each consumer. State both consumers' utility maximization problems and solve them. (Hint: Given Romeo's and Juliet's identical preferences, they will have identical tangency con- ditions for optimal consumer choice but different budget constraints.) Derive both consumers' demands for pizza and wine as functions of market prices P1 and 22. (d) (7 points) State the market clearing conditions for any one of the markets in this economy. Using your results from (C), find the equilibrium price ratio between pizza and wine. Explain why it is not necessary to consider the other market. (e) (7 points) Calculate the equilibrium allocations. Is the market equilibrium found in (d) and (e) Pareto-efficient? Why or why not? Illustrate your answer graphically

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Answer the following 1. Solow model in continuous time. Consider the Solow model in continuous time with pro- duction function y = f(k) satisfying the usual properties, constant savings rate s,...

123 Compare the purely graphical properties of these two notations, and the ways in which the graphical properties of each display correspond to the information structure being defined. Describe...

Teuro5 For the year ending December 31, 2021, the Company's income statement is as follows: Revenues $1,093,000 Expenses: Cost Of Goods Sold ($206,000) Administrative Costs ( 152,000) Amortization...

accccc Research Problem 4. Use information about individual income tax returns available at the IRS Tax Stats website (irs.gov/statistics/soi-tax-stats-individual-income-tax-returns) to find data on...

answers shd be only handwritten Hassan and Dana had bought a property valued at $1,225,000 for 20% down and a mortgage amortized over 25 years on March 1, 2018. They made equal end-of-month payments...

Consider a representative university student who decides how much time to spend on study. Let us call this student Bruno, who has been using academic cheating websites for a year in order to 'boost'...

12580 Consider an exchange economy with two goods, ale and bread. There are two individuals, Ann and Bob, whose initial endowments are as fol lows: Ann has 40 units of ale and 20 units of bread, and...

annssw Consider a two person exchange economy with preferences for person i {1,2} being u(c) and endowments being w, where c = (cc) and the endowment for person 1 is wi (w1,0) with w > 0, and for...

man 34 After experiencing a recession for the past two years, the residents of Albernia were looking forward to a decrease in the unemployment rate. Yet after six months of strong positive economic...

The Keynesian approach is to understand, explain and anticipate the behaviour of total expenditure. This is accomplished by dividing total expenditure into different components of expenditure. If one...

M Company had a retained earnings balance of $4,200 on June 30, 2010. For the fiscal year ended June 30, 2011, sales were $24,000 and expenses were $12,500. Cash dividends of $2,500 were declared and...

A sample of the paramagnetic salt to which the magnetization curve of Figure applies is to be tested to see whether it obeys Curie's law. The sample is placed in a uniform 0.50 T magnetic field that...

This is part of Gilles homework. a Explain the mistake Gille has made. b Copy the diagram of shape A and draw the correct Question Reflect shape A in the line y = -1. Label the shape A Answer Mirror...

Question 11 (5 points) Warr Company is considering a project that has the attached cash flows. What is its IRR? 1 Year Cash flows 0 - $1,050 2 $500 3 $500 4 $500 $500 A) 32.58% B) 34.16% C) 31.87% D)...