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Ashly and Betty consume X, and Y

Economics

Ashly and Betty consume X, and Y. Ashly’s utility function is ?? = ?? 0.6?? 0.4 annd Betty's is: ?? = ?? 0.4?? 0.6 Their initial endowments are ?? = 10,?? = 20,?? = 20,?? = 10.

a) Compute the set of Pareto optimal allocations (i.e. the “contract curve").

b) Using your answer from part a, suppose you are on the contract curve and ?? = 5. Find the values of ??,??, ??.

c) Draw the Edgeworth box describing this economy. Include the initial endowments, the contract curve, and the equilibrium allocation. (Note: Start the box with Ashly)

d) Assuming that the price of Y is equal to 1, compute the competitive equilibrium of this economy (i.e. the price of X at which demand for X equals supply of X and demand for Y equals supply of Y).

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