Consider an exchange economy with three commodities and two consumers. Assume that each consumer i =...
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Consider an exchange economy with three commodities and two consumers. Assume that each consumer i = 1,2 has the same endowment wo¹ = (k, k, k) where k is a positive constant. Also, assume that each consumer's preference over the commodities is represented by the following quasilinear utility function: u²(x¹) = x + 2√√xx. That is, u¹(x¹); = x²+2√√√x²x² and u²(x²) = x² + 4√√√xzxz. (a) Assuming an interior solution, compute the excess demand function for each commodity. (b) Show that Walras' law holds. (c) Find the Walrasian equilibrium allocation x* and equilibrium prices p* for this exchange economy, and discuss whether the equilibrium allocation is Pareto efficient. Consider an exchange economy with three commodities and two consumers. Assume that each consumer i = 1,2 has the same endowment wo¹ = (k, k, k) where k is a positive constant. Also, assume that each consumer's preference over the commodities is represented by the following quasilinear utility function: u²(x¹) = x + 2√√xx. That is, u¹(x¹); = x²+2√√√x²x² and u²(x²) = x² + 4√√√xzxz. (a) Assuming an interior solution, compute the excess demand function for each commodity. (b) Show that Walras' law holds. (c) Find the Walrasian equilibrium allocation x* and equilibrium prices p* for this exchange economy, and discuss whether the equilibrium allocation is Pareto efficient.
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a The excess demand function for each commodity can be defined as the difference between the total demand and total supply in the market The total demand is the sum of the demands of all consumers whi... View the full answer
Related Book For
Differential Equations and Linear Algebra
ISBN: 978-0131860612
2nd edition
Authors: Jerry Farlow, James E. Hall, Jean Marie McDill, Beverly H. West
Posted Date:
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