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# 1. Consider the following exchange economy. There are two goods (1 and 2) and two consumers (A an...

## Question

###### 1. Consider the following exchange economy. There are two goods (1 and 2) and two consumers (A an...

1. Consider the following exchange economy. There are two goods (1 and 2) and two consumers (A and B). Preferences and endowments are as follows: uA (イ·攻)-玲攻 TA _ (0,2) 2(4,0) (a) Draw an Edgeworth Box diagram to depict this economy. Your diagram should be clearly labelled, and should include the autar kic allocation as well as a couple of indifference curves for each consumer. (Indifference curves for A do not need to be precisely accurate but those for B should be.) [2 marks] (b) Identify the set of Pareto efficient allocations and indicate these in your diagram 4 marks (c) Let π denote the price ratio pi/p2 i. Compute each consumer's optimal consumption of good 1 and optimal consumption of good 2. (These may be functions of 4 marks ii. What is the Walrasian equilibrium value for π? Illustrate the associated budget line and Walrasian equilibrium allocation WEA) in your Edgeworth Box diagram 3 marks (d) Suppose B's endowment were 7B-(10,0) i. What is the equilibrium value for π in this case? [3 marks] ii. Indicate the new equilibrium budget line and WEA in an Edgeworth Box diagram [2 marks]

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