Question

Consider a pure exchange 2x2 edgeworth box economy model where each individual has preferences given by:

u(x,y) = ln(x) + ln(y)

Consumer A is endowed with 1 unit of x and 2 units of y. Consumer B is endowed with 3 units of x and 1 unit of y. If the prices of good x and y are given by the vector (px, py) = (1, 1), which of the following statements are true? (check all that apply)

1) there is a surplus in the market for good x

2) there is a shortage in the market for good x

3) there is a surplus in the market for good y

2) there is a shortage in the market for good y

Answer 1

Answers options 1 & 4

• there is a surplus in the market for good x

• there is a shortage in the market for good y