Microeconomics,Trade/Exchange problem

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In summary, the market clearing prices for consumers A and B are p1 = 1 and p2 = (1-a)/(a+1), and the equilibrium allocation is xA1 = a, xA2 = (1-a)(1-a)/(a+1), xB1 = xB2 = 1. These values can be found by setting up and solving the system of equations for the budget constraints and equilibrium allocation.
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There are 2 consumers, A and B with the following utility functions and endowments:
uA(xA1, xA2) = a ln xA1 + (1-a) ln xA2 , endowment for A is wA = (0, 1)

uB(xB1,xB2) = min(xB1,xB2) endowment for B is wB = (1,0)

Find the market clearing prices and the equilibrium allocation

From Solutions Manual:

x1A = ay=p1 = ap2=p1; x1B = x2B
so from budget constraint, (p1 +p2)x1B = p1,
so x1B =p1=(p1+p2). Choose p1 = 1 an numeraire and solve
ap2 +1/(1 + p2) = 1.

My textbook is not helpful and I don't know how to get to the answer in the solutions manual. Can anyone give me some help? I'm very lost.
Thanks
 
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! The market clearing prices can be found by setting up the following system of equations:Consumer A's budget constraint: p1xA1 + p2xA2 = wA p1xA1 + p2(1) = 0 => p1xA1 = -p2 Consumer B's budget constraint: p1xB1 + p2xB2 = wB p1(1) + p2xB2 = 1 => p2xB2 = 1 - p1 Equilibrium allocation: xA1 = ay = p1 xA2 = (1-a)y = (1-a)p2 xB1 = xB2 = y = p1 Solving for the market clearing prices, we have: ap2 + 1/(1+p2) = 1 => p2 = (1-a)/(a+1) and p1 = 1 Therefore, the market clearing prices are p1 = 1 and p2 = (1-a)/(a+1). The equilibrium allocation is xA1 = ap1 = a, xA2 = (1-a)p2 = (1-a)(1-a)/(a+1), xB1 = xB2 = y = p1 = 1.
 

Related to Microeconomics,Trade/Exchange problem

What is microeconomics?

Microeconomics is a branch of economics that focuses on the behavior of individuals and firms in making decisions regarding the allocation of scarce resources. It examines the economic choices and interactions of individuals, businesses, and governments at the individual level.

What is the trade/exchange problem in microeconomics?

The trade/exchange problem in microeconomics refers to the challenge of finding the most efficient way to allocate resources between different economic agents or entities, such as individuals, firms, or countries. It involves analyzing the costs, benefits, and trade-offs of different exchange options and determining the most optimal solution.

How does microeconomics impact trade and exchange?

Microeconomics plays a crucial role in understanding and analyzing trade and exchange between different economic agents. By examining individual behavior and decision-making, microeconomics helps to understand how markets function and how resources are allocated, which ultimately affects trade and exchange on a larger scale.

What are some key concepts in microeconomics related to trade and exchange?

Some key concepts in microeconomics related to trade and exchange include supply and demand, market equilibrium, opportunity cost, and comparative advantage. These concepts help to understand the factors that influence trade and exchange decisions and how they affect the overall economy.

How can microeconomics help solve trade and exchange problems?

Microeconomics provides a framework for analyzing and understanding trade and exchange problems. By examining individual behavior and incentives, it can help to identify inefficiencies and suggest solutions to improve the allocation of resources. Additionally, microeconomics can inform government policies and regulations to promote more efficient trade and exchange.

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