Reference no: EM13887966
Consider the following model with two consumers, A and B, and with two commodities, 1 and 2.
uA(x1, x2) = x1 + ln(x2), uB(x1, x2) = x1 + 2 ln(x2),
eA = (eA1, eA2), eB = (eB1, eB2).
Assume that eA1 > 10, eB1 > 10, eA2 > 0, eB2 > 0, and |eA2 + eB2|≤ 1.
(a) Compute an equilibrium where the price of good 1 is 1. The equilibrium price of good 2 and the equilibrium allocations will be formulas in terms of the endowments. (Hint: The endowments of good 1 are so large that each consumer consumes a positive amount of good 1 in equilibrium.)
(b) Show that the price of good 2 and the consumer's consumption of good 2 depends only on eA2 + eB2.
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