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Problem Set 1 Ram Singh

1. The document discusses microeconomics problems involving pure exchange economies with multiple individuals and goods. It analyzes the properties of different allocations and competitive equilibriums, including whether they are Pareto optimal or part of the core. 2. Questions involve analyzing utility functions, endowments, allocations and determining Pareto optimality, competitive equilibrium prices and quantities, and the conditions for uniqueness of equilibrium. 3. Mathematical analysis and graphical illustrations are used to solve problems about contract curves, equilibrium with and without cash transfers, and identifying what conditions are violated when equilibrium is not unique.

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Akshay Jain
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108 views2 pages

Problem Set 1 Ram Singh

1. The document discusses microeconomics problems involving pure exchange economies with multiple individuals and goods. It analyzes the properties of different allocations and competitive equilibriums, including whether they are Pareto optimal or part of the core. 2. Questions involve analyzing utility functions, endowments, allocations and determining Pareto optimality, competitive equilibrium prices and quantities, and the conditions for uniqueness of equilibrium. 3. Mathematical analysis and graphical illustrations are used to solve problems about contract curves, equilibrium with and without cash transfers, and identifying what conditions are violated when equilibrium is not unique.

Uploaded by

Akshay Jain
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ECONOMICS 001 Micro Economics (Part 2) Summer 2013-14 Instructor: Ram Singh Problem 1 Please watch out for

typos! 1. Consider a two-person two-goods economy. Suppose individual utility i i i functions are: ui (xi 1 .x2 ) = x1 .x2 , i = 1, 2. Let initial endowment of the 1 rst person be the vector e = (1, 9), i.e, to start with the rst person has one unit of good one and nine units of good two. Let, e2 = (9, 1). Now, consider an allocation x = (x1 , x2 ), where x1 = (3, 3) and x2 = (7, 7). (a) Is allocation x = (x1 , x2 ) Pareto optimum? (b) Does it belong to the Core? 2. Let us replicate the above economy. Suppose, now there are four individui i i als but only two goods as above. Utility functions are: ui (xi 1 .x2 ) = x1 .x2 , 1 2 3 i = 1, ..., 4. Let initial endowments be e = (1, 9), e = (9, 1), e = (1, 9), and e4 = (9, 1). That is, person 3 is a twin of person 1, and 4 is twin of person 2. Next, consider an allocation x = (x1 , x2 , x3 , x4 ), where x1 = (3, 3) = x3 and x2 = (7, 7) = x4 . (a) Is allocation x = (x1 , x2 , x3 , x4 ) Pareto optimum? (b) Does it belong to the Core? 3. Consider a pure exchange economy; (ui (.), ei )iI . Suppose x = (x1 , x2 , ..., xI ) is a feasible allocation, and S {1, ..., I } is a blocking coalitions for x = (x1 , x2 , ..., xI ). Which of the following is necessarily true? (a) Allocation x = (x1 , x2 , ..., xI ) is not Pareto optimum (b) Allocation e = (e1 , e2 , ..., eI ) is not Pareto optimum Explain your answer. 4. Answer the above question assuming that allocation x = (x1 , x2 , ..., xI ) is Pareto superior to e = (e1 , e2 , ..., eI ). 5. Consider a two-person two-goods pure exchange economy. The initial endowment vectors are e1 = (1, 0) and e2 = (0, 1). Utility function is ui (x, y ) = x y for individual i = 1, 2, where x is the quantity of the rst good and y is the quantity of the second good consumed; x, y 0. For this economy: (a) Draw the contract curve assuming = = 1.

(b) Draw the contract curve assuming = 1 and (0, 1). (c) Find out the competitive equilibrium price and consumption vectors assuming = = 1. (d) Find out the competitive equilibrium price and consumption vectors assuming = 1 and (0, 1). 6. Consider a two-person two-goods pure exchange economy. The initial endowment vectors are e1 = (1, 0) and e2 = (0, 1). Utility function for person 1 is: 1, when x + y < 1 u1 (x, y ) = x + y, when x + y 1, where x is the quantity of the rst good and y is the quantity of the second good. Utility function for person 2 is: u2 (x, y ) = x + y . x, y 0. For this economy: (a) Find out a competitive equilibrium, assuming p1 = p2 = 1. (You can take it that there is at least one competitive equilibrium) (b) Is the competitive equilibrium Pareto ecient? Why or why not? Explain the nding. 7. Consider a two-person two-goods pure exchange economy. The initial 1 ) and e2 = (0, 1 endowment vectors are: e1 = (1, 2 2 ). The utility functions 1 1 1 2 2 are: u (.) = x1 + 2x2 and u (.) = x2 x ; x, y 0. For this economy: 1 2 (a) Find out the competitive equilibrium vectors of consumptions and prices. Denote the equilibrium vector of prices by p = (p 1 , p1 ). (b) Find out the competitive equilibrium with cash transfers, assuming p 1 that person 1 is required to pay 2 to person 2. 8. Consider a two-person two-goods pure exchange economy. The initial 1 8 endowment vectors are: e1 = (2, r) and e1 = (r, 2), where r = 2 9 2 9 . 1 1 1 1 2 2 The utility functions are: u1 (.) = x1 1 8 x1 and u (.) = 8 x2 + x2 . For 2 1 this economy: (a) Show that there are three competitive equilibria: with price vector 1 p2 p = (p 1 , p2 ) p = 2 , 1, and 2.
1

(b) Which of the conditions necessary for uniqueness of competitive equilibrium is/are violated by the above economy?

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