- Consider an economy with two consumers, A and B, and two goods. The endowments are w A = (1, 3) and w B = (2, 2). The two consumers have the same utility function. U h (x h 1, xh 2) = 5 + oln(x h 1) + (1 o)ln(x h 2) (a) Normalize prices and solve for the utility maximizing demands of consumer A. Repeat for consumer B. (b) Use the market clearing condition to find the W.E. price and demands. Verify that there is no excess demand in either goods market. (c) Show how the equilibrium price is affected by a change in σ. Explain the result. (d) Show how the equilibrium price and x B 1 are effected by an increase in w A 1. Explain the result.

- Consider an economy with two consumers, A and B, and two goods. The endowments are w A = (1, 3) and w B = (2, 2). The two consumers have the same utility function. U h (x h 1, xh 2) = 5 + oln(x h 1) + (1 o)ln(x h 2) (a) Normalize prices and solve for the utility maximizing demands of consumer A. Repeat for consumer B. (b) Use the market clearing condition to find the W.E. price and demands. Verify that there is no excess demand in either goods market. (c) Show how the equilibrium price is affected by a change in σ. Explain the result. (d) Show how the equilibrium price and x B 1 are effected by an increase in w A 1. Explain the result.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter6: Demand Relationships Among Goods

Section: Chapter Questions

Problem 6.9P

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