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Questions › DSE › DSE 2010 › Q51
2 marksMicroeconomics › General equilibrium and exchange economies › Competitive equilibrium in an exchange economyHardabout 4 min

DSE 2010 Question 51: General equilibrium and exchange economies

Consider an exchange economy with agents 1 and 2 and goods x,yx,yx,y. Agent 1's endowment is (0,1)(0,1)(0,1) and agent 2's is (2,0)(2,0)(2,0); only nonnegative consumption is allowed. Agent 1 lexicographically prefers xxx to yyy (more xxx always better; ties broken by more yyy). Agent 2 treats xxx and yyy as perfect substitutes, strictly preferring (x,y)(x,y)(x,y) to (x′,y′)(x',y')(x′,y′) iff x+y>x′+y′x+y>x'+y'x+y>x′+y′. The competitive equilibrium allocation for this economy is

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Consider an exchange economy with agents 1 and 2 and goods x,y. Agent 1's endowment is (0,1) and agent 2's is (2,0); only nonnegative consumption is allowed. Agent 1 lexicographically prefers x to y (more x always better; ties broken by more y). Agent 2 treats x and y as perfect substitutes, strictly preferring (x,y) to (x′,y′) iff x+y>x′+y′. The competitive equilibrium allocation for this economy is (A) 1 gets (0,1) and 2 gets (2,0) (B) 1 gets (2,0) and 2 gets (0,1) (C) 1 gets (3/2,0) and 2 gets (1/2,1) (D) 1 gets (1,0) and 2 gets (1,1)

Also written as: Consider an exchange economy with agents 1 and 2 and goods x,y. Agent 1's endowment is (0,1) and agent 2's is (2,0); only nonnegative consumption is allowed. Agent 1 lexicographically prefers x to y (more x always better; ties broken by more y). Agent 2 treats x and y as perfect substitutes, strictly preferring (x,y) to (x',y') iff x+y>x'+y'. The competitive equilibrium allocation for this economy is

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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