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4: There is an exchange economy with two agents, A, B, and two goods,  x, y. A's...

4: There is an exchange economy with two agents, A, B, and two goods,  x, y. A's endowment is x = 6, y = 4, and B's endowment is x = 4, y = 6.

(a) A has the utility function  u(x, y) = x + y  and B u(x, y) = xy. Find a competitive equilibrium allocation (CEA) and associated equilibrium prices. What difference would it make if A's endowment is x = 3, y = 1, and B's endowment is x = 7, y = 9? (Diagrammatic/geometric reasoning is fine)

(b) A has the utility function u(x, y) = x2+ y2 (the indifference curves are “bowed out”); B’s has the utility function min{x, y}. Find the contract curve for this economy, and discuss whether there is a competitive equilibrium allocation (CEA) for some prices?

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Answer #1

B) now in Competitive eqm,

For A, corner solution will be possible only

So , either , XA = 0 or YA = 0

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