Lahore University of Management Sciences

Department of Economics

Homework # 2 Due: March 22, 2024 (5:00 pm)

1. Do the problem no. 2.7 on page no. 78 of chapter no. 2 of Microeconomic Theory by Layard
and Walters. (20 marks)
2. Do the problem no. 2.10 on page no. 81 of chapter no. 2 of Microeconomic Theory by
Layard and Walters. (20 marks)
3. Do the problem no. 6 on page no. 575 of chapter no. 18 of Structure of Economics by
Silberberg and Suen. (35 marks)
4. Consider the general equilibrium of a pure exchange economy in which two agents may
engage in trade. The utility functions for the two agents are identical: U 1 = A1B1 and U2
= A2B2, where Ai and Bi are consumption levels of the two goods, A and B, for agent i (i =
1, 2). The initial endowment vectors are given as follows: Agent 1: (a 1, b1) = (0, 10); Agent
2: (a2, b2) = (10, 0). Suppose that they both maximize utility and that each agent accepts as
given the market price as quoted by a referee. Answer the following questions:

a. Calculate the demand functions of both agents. (5 marks)

b. Determine the equilibrium prices that will clear the markets. (5 marks)
c. Calculate the equilibrium allocation in consumption. (5 marks)
d. Construct the locus of equilibrium points (the offer curve) for each agent.
Examine the shape of the two offer curves, using the geometrical construction
of Edgeworth-Bowley consumption box. (5 marks)
e. Show that the results derived in (b) and (c) satisfy both offer curves. (5
marks)