Q2. In a two-persons (Ms. A and Mr. B), two-commodities (apples and oranges), pu
ID: 1115985 • Letter: Q
Question
Q2. In a two-persons (Ms. A and Mr. B), two-commodities (apples and oranges), pure ex- change economy, Ms. A likes only apples and does not care how many oranges she has. On the other hand, Mr. B likes only oranges and does not care how many apples he has. Both people behave as price-takers. (i) Suppose that A owns all the apples and Ball theoranges. Is there a Walrasian equilibrium? If so, what is (are) the equilibrium price and allocation(s)? (ii) What are the Pareto optimal allocations in such an economy? (ii) Suppose now that the initial endowments are such that Ms. A owns some oranges and Mr. B some apples. Is there a Walrasian equilibrium? If so, describe any equilibrium price and allocation.Explanation / Answer
1) Since, A likes only apples and B likes only oranges and the initial allocation is in their favour, i.e, A has apples and B has oranges. Yes, there is a walrasian equilibrium at the corner point of the edgeworth box which has all of apples and oranges. Equilibrium price can not be determined from the above information. Eqm allocation will be A(all apples) B (all oranges)
2) Yes, the allocation which was discussed above is a pareto optimal allocation as any other allocation is pareto inferior to that allocation.
3)yes, there is an eqm, A will trade and give all of the oranges for apples and same goes for B.
The allocation will be similar to the previous case. we can't comment on the price, More info is needed.
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