Advanced Microeconomics

Problem set on Edgeworth box economy

𝑈1 𝑈2 𝑒1 𝑒2
0.5 0.5 0.3 0.7
1 𝑥11 𝑥12 𝑥21 𝑥22 (5,15) (15,15)
0.4 0.6 0.3 0.7
2 𝑥11 𝑥12 𝑥21 𝑥22 (5,15) (15,15)
0.5 0.5 0.3 0.7
3 𝑥11 𝑥12 𝑥21 𝑥22 (10,15) (10,15)
min⁡{𝑥1 , 2𝑥2 } 0.2 0.8
4** 𝑥21 𝑥22 (10,0) (0,10)
0.5 0.5 𝑥21 + 3𝑥22
5* 𝑥11 𝑥12 (5, 8) (5, 2)
6** 𝑥11 + 2𝑥12 2𝑥21 + 𝑥22 (5,5) (5,5)
7** min{𝑥11 , 3𝑥12 } min{2𝑥21 , 𝑥22 } (0,10) (10, 0)

In each of the example,

- Find the equation of Pareto curve

- Show the Pareto curve in the Edgeworth box diagram. The diagram should reflect the magnitude

of endowments, whether endowment is on Pareto curve, shape of the curve and whether curve is

passing through origins.

- Then find the equilibrium price.

- Using equilibrium price, find the 𝑥 ∗ , that is an equilibrium allocation.

- Verify that 𝑥 ∗ is an equilibrium allocation.

Questions with ‘**’ are toughest and with ‘*’ are tougher. Solely from scoring good grades in the course,

one can steer clear of them. But if one intends to provide better understanding of the concepts, one is

advised to try them.

In questions 1, 2, and 3, please provide intuitive economic explanation of change in equilibrium price.

Treat 1st sum as the base case.