Find the competitive equilibrium relative price

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Reference no: EM13236810

Consider a two-good exchange economy with two individuals, A and B. A's preference is represented by uA(xA1, xA2) = 0.3ln(xA1) + 0.7ln(xA2), and B's is represented by uB(xB1, xB2) = 0.8ln(xB1) + 0.2ln(xB2). A's initial holding is (wA1, wA2) = (10,4) and B's is (wB1, wB2) = (8,12).

a) Calculate the demand function for each of A and B.

b) Find the competitive equilibrium relative price p1/p2, by equating the demand for good 1 (or good 2) to the supply of it.

c) Derive the equation which describes the set of efficient allocations (ie, contract curve).

Reference no: EM13236810

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