2. The following statements are either true or false. State which, and justify y

Question

2. The following statements are either true or false. State which, and justify your choice in no more than one page, double-spaced for each. a) Consider a 4 person economy, and assume that all individuals have well-behaved preferences. True or False: according to a utilitarian social welfare function, distribution A is better than distribution B. A: U,-100,U2 20;U-500 b) Consider a 2-person, 2-good exchange economy, where preferences are well-behaved. True or False: if there is a competitive equilibrium with prices of both goods equal to $4.00, then there is also a competitive equilibrium where both prices are equal to $3.73 c) True or False: the core of a 2x2 exchange economy can never be larger than the contract curve for that economy.

Explanation / Answer

a).

Consider the given problem here we have given two distribution “A” and “B”. Now, the sum of these utility will be “640”. Now, product of these utility under “A” is less than the same under “B”, => on the basis of “utilitarian social welfare function”, “B” is better compare to “A”.

So, here the “statement” is “FALSE”.

b).

Now, in the competitive market the equilibrium price will be determined by the forces of “demand” and “supply”. Now, the demand will come from the consumer preferences or utility function and the supply curve will come from the available supply. So, if the initial price of both goods are “4”, => the relative price will be “1” be an competitive equilibrium.

Now, if the prices of both the goods are “3.73”, => also implied the same relative price “1”, => both represent the same competitive equilibrium, => the given statement is “TRUE”.

c).

Now, in “2 X 2” exchange economy the contract curve shows all the efficient allocation between two consumers or individuals. Now, contract curve shows all the feasible as well as efficient allocation between two individuals given the resources and preferences. So, core is sub set of contract curve, => the given statement is “TRUE”.

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