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PSet 2 Questions

PS 2 microeconomics II UPF

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46 views3 pages

PSet 2 Questions

PS 2 microeconomics II UPF

Uploaded by

animalgame21
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Problem Set #2 General Equilibrium

Microeconomics II
Miguel de Quinto and Daniel Sanchez

1. Consider a pure exchange Edgeworth Box economy of two agents (A and B) and
two goods (1 and 2). Assume that markets are perfectly competitive and that the
agents take the prices as given. Agent the initial endowments are

ω A = (ω1A , ω2A ) = (1, 10)


ω B = (ω1B , ω2B ) = (5, 14).

Individual preferences can be represented through the following utility function:


q q
U i (xi1 , xi2 ) = xi1 + xi2

where i ∈ {A, B}.

(a) Determine the set of Pareto efficient allocations in this economy. In other
words, find an expression for the contract curve and draw it in the Edgeworth
Box.
(b) Determine the competitive equilibrium in this economy. That is, find the
equilibrium prices and allocation. (Hint: Walras’s Law will apply here and
you can use good 2 as a numéraire.)
(c) Suppose that the government dislikes inequality in the consumption of good
1. In particular, it wants to achieve an allocation such that xA B
1 = x1 . Al-
low the government to redistribute units of good 2 through lump-sum taxes
′ A′ B′ B′
and/or subsidies. What will the efficient allocation x′ = ((xA
1 , x2 ), (x1 , x2 ))
be? What initial endowment ω ′ will allow x′ to be achieved as an equilibrium
allocation? What will the equilibrium relative prices be?
(d) Suppose that instead of redistributing units of good 2, the government wants
to achieve a greater consumption of good 1 by agent A by setting a maximum
price p1 = 1. Would that work? What would the result be? In your answer,
provide a graphical explanation.

2. Suppose a standard Edgeworth Box economy in which agents have preferences


given by
U A (xA A A A B B B B B
1 , x2 ) = x1 (x2 + 1) and U (x1 , x2 ) = x1 x2 .

Suppose the initial endowment is ω = ((2, 6), (8, 4)).

1
(a) Find the competitive equilibrium (Hint: do not worry about corner solu-
tions).
(b) Is there a redistribution of the total endowment that would allow the govern-
ment to achieve ((5, 5), (5, 5)) as a competitive equilibrium allocation? Why
or why not?

3. Suppose there are two commodities 1 and 2 and two agents A and B in a pure
exchange economy. Let the endowments be

ω A = (ω1A , ω2A ) = (9, 1)


ω B = (ω1B , ω2B ) = (1, 5).

Find the competitive equilibria (whenever they exist) in the following cases:

(a) U A (xA A A A B B B B B
1 , x2 ) = x1 x2 and U (x1 , x2 ) = x1 x2 .

(b) U A (xA A A A B B B B B
1 , x2 ) = x1 x2 and U (x1 , x2 ) = x1 + x2 .

(c) U A (xA A A A B B B B 2 B 2
1 , x2 ) = x1 x2 and U (x1 , x2 ) = (x1 ) + (x2 ) .

4. Andrea and Bart are agents in a standard Edgeworth Box economy with initial
endowment ω = ((1, 4), (4, 8)). Moreover, their respective utility functions are
q q q
uA (xA
1 , xA
2 ) = x A
1 + x A
2 and u B
(x B
1 , xB
2 ) = xB B
1 x2 .

(a) Find the core of the economy.


(b) Using your answer to 4a, find the competitive equilibrium (Hint: The prob-
lem can be solved without making too many calculations).
(c) Let p1 = 1. It is known that at some price p2 , there is an excess of demand
of 11 unit of good 1, while there is an excess “supply” of 5.5 units of good 2.
Find Andrea’s and Bart’s individual demands for each good at that price.

5. Andrea and Bart are agents in a standard Edgeworth Box economy in which there
is a total endowment of 10 units of each good. their respective utility functions
are such that
q q
uA (xA
1 , xA
2 ) = x A
1 + xA B B B B B
2 and u (x1 , x2 ) = min{x1 , x2 }.

Consider allocation t = ((8, 3), (2, 7)).

(a) Show that t cannot constitute a competitive equilibrium allocation.


(b) Assume that the initial endowment is ω = t. Find the competitive equilib-
rium and describe which trades will occur between Andrea and Bart.

2
6. Andrea and Bart are two agents in a standard Edgeworth Box economy with
two goods. The initial endowment is ω = ((3, 3), (7, 7)). Andrea’s and Bart’s
preferences are such that

U A (xA A A B B B B B
1 , x2 ) = x1 and U (x1 , x2 ) = x1 + x2 .

(a) Find the core of the economy.


(b) Find the competitive equilibrium.

7. Andrea and Bart are two agents in a standard Edgeworth Box economy with two
goods. Assume a positive total endowment of both goods (as usual) and let the
initial endowment be denoted by ω = ((ω1A , ω2A ), (ω1B , ω2B )). Andrea’s and Bart’s
preferences are such that

U A (xA A A A B B B B 2 B 2
1 , x2 ) = max{x1 , x2 } and U (x1 , x2 ) = (x1 ) + (x2 )

(a) Let p1 = 1. Find Andrea’s and Bart’s demand functions as a function of


p2 and the parameters. (Hint: Bear in mind that these preferences are not
convex).
(b) Does a competitive equilibrium exist? Does your answer depend on the
initial endowment? Justify your answer.

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