Question Three Suppose that there are two consumers in an exchange economy with two goods. There are total of ten units

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Question Three Suppose That There Are Two Consumers In An Exchange Economy With Two Goods There Are Total Of Ten Units 1 (121.05 KiB) Viewed 22 times

Question Three Suppose that there are two consumers in an exchange economy with two goods. There are total of ten units of each good. The initial endowments for these consumers are (e₁x, e₁y) for consumer 1 and (e2x, e2y) for consumer 2, where e2x = 10 e1x and e2y = 10 - e₁y. Consumer 1 has utility function u(x₁, y₁) = X₁¹/³ y₁2/³, while consumer 2 has utility function given as v(y₁, y2) = X2²/3 y2¹/3 (a) Normalize the price of good 1 to 1 and denote the price of good 2 by p. Write the budget constraints for each consumer. (b) Solve for each consumer's optimal consumption bundle as a function of price p. (c) Is each person's consumption of good x increasing or decreasing as a function of p? Explain the meaning of this result in words. (d) What is the equilibrium price for the initial allocation of (6, 2) to consumer 1 and (4, 8) to consumer 2? What are the resulting equilibrium bundles?