Microeconomic Theory Dr.

Heman Das Lohano

Assignment 4
Due on Monday, 6 May 2024
Note:
• Write your assignment by hand using a pen; computer typing is not allowed. Submit it
before the start of class on Monday (29 April or latest by 6 May).
• In case you cannot attend the class, submit a soft copy on LMS by the due date and time.
Additionally, submit a hard copy in the next class.
• Each assignment carries 5 marks. If any assignment is submitted after the due date and
time, 1 mark will be deducted for each day of late submission.

Q:
Consider a pure exchange economy with two commodities (x, y), and two consumers A and
B, who have identical preferences represented by the following utility functions:

𝑈(𝑥 𝐴 , 𝑦 𝐴 ) = 𝑥 𝐴 𝑦 𝐴

𝑈(𝑥 𝐵 , 𝑦 𝐵 ) = 𝑥 𝐵 𝑦 𝐵
Suppose initial endowments are:
(𝜔𝑥𝐴 , 𝜔𝑦𝐴 ) = (4, 8)

(𝜔𝑥𝐵 , 𝜔𝑦𝐵 ) = (36, 12)

Total resources are:
(𝜔𝑥 , 𝜔𝑦 ) = (40, 20)

(a) Draw the Edgeworth box and the initial endowment point.

(b) Find Walrasian equilibrium prices and quantities (𝑝𝑥∗ , 𝑝𝑦∗ ; 𝑥 𝐴∗ , 𝑦 𝐴∗ , 𝑥 𝐵∗ , 𝑦 𝐵∗ ).

(c) Compute utility level of each consumer before and after trade, i.e., at the endowments and
at the Walrasian equilibrium. Compute the gain in the utility level for each consumer.

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