Answer Happy

1 The population of a country consists of two types of people in equal numbers. Northerners consume salt 11 and sugar y and have preferences summarised by the utility function (81;91) = a In x1 + (1 - a) In yı Southerners also consume salt 1, and sugar y, and have preferences summarised by utility function U2 ($2,92) = 3 In 32 + (1 - B) In 42. Each Northerner has an endowment wi of salt and each Southerner has an endowment we of sugar. Let p be the relative price of salt. 0 Derive an expression for the value of p at which aggregate excess demand for sugar is zero. What is the aggregate excess demand for salt at that price? Comment on the reasons for this result. (ii) What are the equilibrium allocations of salt and sugar? (ii) Discovery of new salt resources in the North increases each Northerner's endowment of salt. What happens to the equilibrium price? Who is better off as a result of the discovery? Explain. (iv) Suppose the salt discovery happens in the South instead so that each Southerner acquires a small endow- ment of salt. Who benefits? Explain the contrast.