TUTORIAL 4
INTERMEDIATE
MICROECONOMICS
PRESENTERS
Arooj Fatima
Rashid Ali
Nada Raef
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QUESTION 1
(A). EDGEWORTH BOX
Endowment:
• Consumer A = (20 , 5)
• Consumer B = (20 , 3)
Total x in the economy = 20 + 20 = 40
Total y in the economy = 5 + 3 = 8
Total x and y = (40, 8)
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QUESTION 1
(B). CONTRACT CURVE IN TERMS OF X A AND Y A
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QUESTION 1
(B). CONTRACT CURVE IN TERMS OF X A AND Y A
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QUESTION 1
(C) IS THE ENDOWMENT ALLOCATION PARETO EFFICIENT?
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QUESTION 1
(C) IS MOVING FROM (X A = 16, Y A = 6, X B =
24, Y B = 2) TO THE ENDOWMENT ALLOCATION
A PARETO IMPROVEMENT?
Utility at (xA = 16, yA = 6, xB = 24, yB = 2):
For A, U A = 16*6 = 96
For B U B = 2*24*2 = 96
Utility at endowment:
For A, U A = 20*5 = 100
For B U B = 2*20*3 = 120
Both utilities increase; neither is worse off, and both are
better off.
Pareto Improvement.
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QUESTION 2
(A)WHAT IS THE UTILITY-MAXIMIZING
BASKET FOR EACH CONSUMER?
Px = 1
Py = 2
Budget constraint for A:
xA + 2yA = 30
Budget constraint for B:
xB + 2yB = 26
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QUESTION 2
(A)WHAT IS THE UTILITY-MAXIMIZING
BASKET FOR EACH CONSUMER?
Basket for A Basket for B
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(B) HOW MUCH OF EACH GOOD DOES EACH CONSUMER
WANT TO BUY OR SELL? ARE THE MARKETS IN
EQUILIBRIUM AT THE GIVEN PRICES?
Consumer A
Final: (15, 7.5)
Endowment: (20, 5)
This consumer will sell 5 units of x and will buy 2.5 units of
y.
Consumer B
Final: (13, 6.5)
Endowment: (20, 3)
This consumer will sell 7 units of x and will buy 3.5.5 units
of y.
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(B) HOW MUCH OF EACH GOOD DOES EACH CONSUMER
WANT TO BUY OR SELL? ARE THE MARKETS IN
EQUILIBRIUM AT THE GIVEN PRICES?
Both consumers want to sell x.
• 12 units for sale with no buyer
• Excess supply in x-market
Both consumers want to buy y.
• 6 units desired with no sellers
• Excess demand in y-market.
Markets are not in equilibrium at the given prices.
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QUESTION 3
• There are two consumers, Tom and Jerry, in an
exchange economy.
• Each of them consumes two goods, cheese and
ham.
• Total units of cheese = 11
• Total units of ham = 12 available in the economy.
• Suppose both Tom and Jerry like cheese and ham.
• So, for each consumer, the marginal utility of
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(A). IS THE ALLOCATION WHERE TOM CONSUMES
NOTHING WHILE JERRY CONSUMES 10 UNITS OF
CHEESE AND 12 UNITS OF HAM PARETO EFFICIENT?
This allocation is Pareto
efficient.
Tom has zero goods, so the only way
to make him better off is to give him
some cheese or ham. But that would
hurt Jerry, no Pareto improvement is
possible.
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(B). IS THE ALLOCATION WHERE TOM CONSUMES 10
UNITS OF CHEESE AND 12 UNITS OF HAM WHILE
JERRY CONSUMES NOTHING PARETO EFFICIENT?
This allocation is also Pareto
efficient.
Jerry has zero goods, so the only way to
improve his situation is to give him some
cheese or ham. But this would require
taking goods from Tom, making Tom
worse off. Again, no one can be made
better off without hurting the other. 14
QUESTION 4
(A). DERIVE THE EQUATION OF THE CONTRACT
CURVE IN TERMS OF X A AND Y A .
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QUESTION 4
(A). DERIVE THE EQUATION OF THE CONTRACT
CURVE IN TERMS OF X A AND Y A .
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QUESTION 4
(B). SET X AS A NUMERAIRE. THAT IS, ASSUME THE PRICE OF X IS
$1. FIND THE COMPETITIVE EQUILIBRIUM ALLOCATION AND THE
EQUILIBRIUM PRICE OF Y.
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QUESTION 4
(B). CONT. FOR CONSUMER A
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QUESTION 4
(B). CONT. FOR CONSUMER B
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QUESTION 4
(B). CONT. FOR MARKET CLEARING
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THANK YOU
XIE XIE
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