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Questions › DSE › DSE 2008 › Q34
2 marksMicroeconomics › General equilibrium and exchange economies › Competitive equilibrium in an exchange economyModerateabout 3 min

DSE 2008 Question 34: General equilibrium and exchange economies

Setup, from Q32 of the paper:

Consider an exchange economy with persons 1 and 2 and goods x and y. Person 1's utility is u1(x,y)=x2y2u_{1}(x,y)=x^{2}y^{2}u1​(x,y)=x2y2 and person 2's is u2(x,y)=ex+yu_{2}(x,y)=e^{x+y}u2​(x,y)=ex+y. The total endowment is (2,1)(2,1)(2,1). The allocation (x1,y1)=(1,1)(x_{1},y_{1})=(1,1)(x1​,y1​)=(1,1) and (x2,y2)=(1,0)(x_{2},y_{2})=(1,0)(x2​,y2​)=(1,0) is

Consider the situation of the preceding question. Which of the following is an equilibrium price vector?

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Answer and worked solution

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Plain-text version

Setup, from Q32 of the paper: Consider an exchange economy with persons 1 and 2 and goods x and y. Person 1's utility is u₁(x,y)=x²y² and person 2's is u₂(x,y)=e^(x+y). The total endowment is (2,1). The allocation (x₁,y₁)=(1,1) and (x₂,y₂)=(1,0) is Consider the situation of the preceding question. Which of the following is an equilibrium price vector? (A) (p₁,p₂)=(1,0) (B) (p₁,p₂)=(0,1) (C) (p₁,p₂)=(1,1) (D) none of the above

Also written as: Setup, from Q32 of the paper: Consider an exchange economy with persons 1 and 2 and goods x and y. Person 1's utility is u_1(x,y)=x^2y^2 and person 2's is u_2(x,y)=e^(x+y). The total endowment is (2,1). The allocation (x_1,y_1)=(1,1) and (x_2,y_2)=(1,0) is Consider the situation of the preceding question. Which of the following is an equilibrium price vector?

General equilibrium and exchange economies has come up 69 times in 7 exams since 2004.

What this question tests

This question is on Competitive equilibrium in an exchange economy, part of General equilibrium and exchange economies in Microeconomics.

Finding the prices at which every consumer's chosen bundle clears the market.

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Question from the DSE 2008 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.