Consider a two-period economy consisting of people with
identical preferences and identical
endowments. There are two consumption goods, one for each period
(C1 and C2); the goods have
prices P1 and P2, respectively. The endowment of the first period
is the same as the endowment
for the second period.
The preferences are of the form U(C1, C2) = ln(C1) + 0.99 *
ln(C2)
Let the number of people in this economy be 1. Let the endowment of
C1,C2 be 1000,1000 respectively.
Assume the first good has a price of P1=$1. What is the
market-clearing price of the other
good?
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