ECO 330TPOLITICAL ECONOMYSPRING 2017HOMEWORK #2(due 2/1)To start with, consider an economy with no production. There are twoconsumers in the economy. Consumer 1 has an initial endowment of (130, 190)and has an MRS for these two goods of 2y1/x1. Consumer 2 has an initialendowment of (70, 60) and has an MRS for these two goods of y 2/x2. As with thelast HW, decimal answers are possible.1. Show that P = px/py =1 is not a competitive equilibrium price but P = 2 is. (3points)2. Draw an edgeworth box including the initial endowment, the CE allocation,the budget constraint, and the IC for both consumers through the CE allocation.Explain why we know the contract curve is not linear. (4 points)3. Suppose that person 2 is considered more important and should, therefore,have a bigger allocation of the goods. So now the initial endowment of person 2is (96, 225). Show that the new competitive equilibrium allocation ends up withperson 1 having (80, 62.5) and person 2 having (120, 187.5) and show that thenew equilibrium price is no longer 2. (Note: a picture is not required for credithere, but may be helpful in giving you insight on how to solve the problem) (3points)4. Now there is a change so (200, 250) is just one of many options along a PPFthat has a MRT of 5x/2y. Show that now, the outcome in (1) is PE but theoutcome in (3) is not. (2 points)5. If (176, 275) is also on the same PPF as in #4, find the PE allocation of thegoods between the individuals. (Note: This becomes a bit tedious with thealgebra since you have to solve 4 equations and 4 unknowns. Just do somesubstituting. Be careful that when you combine to eliminate an equation, youmust also eliminate an unknown. Also, all answers are exact to 2 decimalplaces)(3 points)
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