Solution-Consider a two-person economy

Consider a two-person economy

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Consider a two-person economy (persons A and B). Both A and B consume only two goods, x and y and their utility functions are given by: UA = UA(x, y) = min[x, 2y] and U B = U B(x, y) = min[2x, y]. Further, assume that A's initial endowment (x,y) = (0,10) and B's initial endowment (x,y) = (10,0).

(a) If they decide to consume whatever they have, what will their utilities be?

(b) Obtain price offer curves for A and B.

(c) From their preferences and initial endowments, are you able to tell whether A and B can benefit from trade? If they do, who is the buyer in markets x and y? What will the exchange ratio be?

Reference no: EM132492366

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Consider a two-person economy

Reference no: EM132492366

Reference no: EM132492366

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