Q.2. (32 Points) Consider an economy with 2 goods, H number of households and m
ID: 1140344 • Letter: Q
Question
Q.2. (32 Points) Consider an economy with 2 goods, H number of households and m number of firms. Each consumer, h, has an endowment of 2 units of good 1 and none of good 2. Consumer preferences described by Uh(, X) = (x). (x),h= 1, consumer has a share e- in firm j -1,..,m , H. Each Each firm has a technology characterized by the production function y2 a. Calculate a firm's profit -maximizing choices, a consumer's demands and the -[-y competitive equilibrium of the economy. b. What happens to 22 as (i) m increases? Why? i) H increases? Why? the change in relative prices. (i) the distribution of endowments among consumers; and C. Suppose each consumer's endowment of good 1 increases to 2 + 2. Explain d. What is the effect of changing: (ii) the consumer's preferences to Uh (4, x -. log (x) + . log (x )?Explanation / Answer
an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come.[1] The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.[2]
There are infinitely many indifference curves: one passes through each combination. A collection of (selected) indifference curves, illustrated graphically, is referred to as an indifference map.
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