EC 203 - INTERMEDIATE MICROECONOMICS

Boğaziçi University - Department of Economics

Fall 2019
Problem Set 10

For all of the questions below, assume that there are only two consumers, Ms. A and Mr. B; and there are
only two goods, good 1 and good 2. Also, xA B
i denotes an amount of good i for Ms. A, and xi denotes an amount
of good i for Mr. B. And, wiA denotes the initial endowment of good i for Ms. A, and wiB denotes the initial
endowment of good i for Mr. B.

1. Ms. A’s utility function is uA xA = ln xA A B = xB +8xB . Endowments

1 +x2 . Mr. B’s utility function is uB x 1 2
are given by ω A = (4, 2) and ω B = (3, 5). Find the contract curve.

2. Ms. A’s utility function is

uA xA A A A


1 , x2 = 2x1 + x2 ,

while Mr. B’s utility function is

uB xB B B B


1 , x2 = x1 + 2x2 .

There is a total of ω 1 of good 1 and ω 2 of good 2 available in the economy. Find the set of all Pareto efficient
allocations in the economy. (Hint: Try drawing the indifference curves on an Edgeworth Box and checking
for possible Pareto improvements at the different allocations.)

3. For Ms. A, goods 1 and 2 are perfect complements. For Mr. B, goods 1 and 2 are perfect substitutes.
Endowments are given by ω A = (10, 0) and ω B = (0, 10) . Let p2 = 1. Find the competitive equilibrium.

4. For both Ms. A and Mr. B, goods 1 and 2 are perfect complements. Endowments are given by ω A = (10, 0)
and ω B = (0, 10) . Let p2 = 1. Find the competitive equilibrium.

5. Ms. A’s utility function is

q A
uA xA
1 , xA
2 = x1 + xA
2,

while Mr. B’s utility function is q

uB xB B B
xB


1 , x2 = x 1 + 2.

(a) Find the competitive (Walrasian) equilibrium in this economy when ω1A = 2, ω1B = 0, ω2A = 1, ω2B = 2
and p2 = 1.
(b) Show that this competitive equilibrium allocation is indeed Pareto efficient?
(c) Suppose that the government of this economy has a desire for the equilibrium allocation to be
1 5 15 1
xA A B B



1 , x2 , x1 , x2 = 8 , 2 , 8 , 2 Is this allocation Pareto efficient?