1. Pure exchange economies are completely described by specifications of agents\
ID: 1141512 • Letter: 1
Question
1. Pure exchange economies are completely described by specifications of agents' preferences and endowments. Consider the following two good, two agent pure exchange economy: . Let x denote agent h's consumption of good i, where i = 1,2 and 1,2. . Let a h = (w, ) denote the quantities of goods x1 and x2 with which agent is initially endowed. Let S2-(,u2) be the aggregate endowment Preferences: 2(2-2 Endowments (2,4) = (3,4) a. Draw an Edgeworth box diagram for this economy showing the set of Pareto efficient allocations b. For one of the allocations in your diagram that is not Pareto efficient, identify in your diagram (one of) the other feasible allocations Pareto superior to it. Explain. c. Is the endowment a Pareto efficient allocation? Why or why not? d. Do agents have equal marginal rates of substitution at the Pareto efficient alloca- tions in this economy? If so, explain why this is important. If not, explain how this can be.Explanation / Answer
the marginal rate of substitution is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility. At equilibrium consumption levels, marginal rates of substitution are identical.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.