Consider a and b live in an exchange economy with two goods

Reference no: EM13363807

Consider A and B live in an exchange economy with two goods x1 and x2. A owns 50 of both goods, and B own 250 of both goods.

A's tastes are captured by the utility function

uA(x1,x2) = x2 + 50lnx1

and B's are captured by the utility function

uB(x1,x2) = x2 + 100lnx1.

a. Let the competitive equilibrium prices be p1 and p2 respectively. Derive both consumers' demand functions for both goods.

b. Find the relationship between p1 and p2 in equilbirum. Does the relationship depend on the endowments (assume interior solutions)? How much of each good will each consumer choose?

c. Suppose the government transfers 100 units of B's good 1 endowment to A. How will the consumers' choices of good 1 in competitive equilibrium change? Explain. (You should answer without repeating the utility maximization calculations.)

Reference no: EM13363807

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