Question
Microeconomics Question on General equilibrium and welfare
Consider a 2-agent, 2-good exchange economy where agent 𝑖 has utility function 𝑢𝑖 (𝑥𝑖 , 𝑦𝑖 ) = max{𝑥𝑖 , 𝑦𝑖 }, 𝑖 = 1,2. The initial endowments of goods 𝑋 and 𝑌 that the agents have are (𝑥̅̅1̅, 𝑦̅̅1̅, 𝑥̅̅2̅, 𝑦̅̅2̅) = (25, 5, 5, 5). Then select the CORRECT choice below where the price vector (𝑝𝑥, 𝑝𝑦) specified is part of a competitive equilibrium.
A
(𝑝𝑥, 𝑝𝑦) = (2,1)
B
(𝑝𝑥, 𝑝𝑦) = (2,2)
C
(𝑝𝑥, 𝑝𝑦) = (1,2)
D
(𝑝𝑥, 𝑝𝑦) = (4,2)
Answer
(𝑝𝑥, 𝑝𝑦) = (2,2)
Explanation
Solution
The correct option is (B): (𝑝𝑥, 𝑝𝑦) = (2,2)