Reference no: EM132407262

There is an island called Homothetica in which all people have the same homothetic utility function of U(x; y) = x1=2y1=2 over goods x and y. There are three income groups on the island, and these groups have incomes of $500, $1,000, and $2,000, respectively. Say there are 500 people in each income group. At prices px and py, say that the poorest people consume 20 units of good x and 40 units of good y each.

(a) What are the prices of good x and y?

(b) If the supply of goods x and y on Homothetica totals 50,000 units and 200,000 units, respectively, will there be any excess demand or excess supply of either of these goods at the prices you calculated in Part (a)?