DSE 2010 Question 52: General equilibrium and exchange economies
Setup, from Q51 of the paper:
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
(Same economy, agent 1 lexicographic for x, agent 2 perfect substitutes.) The set of all possible competitive equilibrium prices consists of all px>0,py>0 such that
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Setup, from Q51 of the paper: 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 (Same economy, agent 1 lexicographic for x, agent 2 perfect substitutes.) The set of all possible competitive equilibrium prices consists of all pₓ>0,p_y>0 such that (A) pₓ/p_y=1 (B) pₓ/p_y≥ 1 (C) pₓ/p_y≤ 1 (D) pₓ/p_y>0
Also written as: Setup, from Q51 of the paper: 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 (Same economy, agent 1 lexicographic for x, agent 2 perfect substitutes.) The set of all possible competitive equilibrium prices consists of all p_x>0,p_y>0 such that
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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