DSE 2006

[CCEcon]

Hi.I'm having problem solving the general equilibrium sums.
Could someone please provide me the explanation for the solutions to 2006.Questions 21,22, and 23.

[duck]

hey hi..

q21> option b.. it is pareto efficient but not competitive equ..

this is because pareto efficient points lies on and inside the band tht u ll get by plotting IC's of two individuals.. and (3,3) and (7,2) lies on that band.. and whn px=0 and py>0 then only we will have competitive equilibrium allocations.. and at these prices the given bundle is not affordable.. therefore, it is not competitive allocation

q22> option a .. both pareto efficient and competitive eq ( same explanation)

q23 > option b .. (0,1)
(same explanation)


just plot IC's and u ll get the thing.. else just try to solve it mathematically by equating the MRS of both individuals.. :)

[Bhaskar Biswas]

How can the (x1,y1)=(10,5), (x2,y2)=(0,0) be a competitive equilibrium, while the initial endowment of individual 2 was (10,0)???

why would individual 2 would particiapte in such a market, only to give, and nothing to get??

actually..i am a bit dumb in all these general equilibrium questions... hope you can help me...

[nidhi]

Hey nidhi i got the logic of pareto efficieny but i did not get the logic of competitive equilibrium could u please explain how u decide that what should be the prices at any  point??                                                      
THANK YOU

[duck]

@nidhi:

see, for the given economy, a competitive allocation is tht allocation where,
1>for a given price, each consumer is maximising his utility such tht value of endownmnt equals value of good they are demanding.. and
2>demand = supply for all commodities.. (or markets clear)

rite?

so, now if you want to find competive allocations, u must find the price ratio first where both would be maximising their utility and then u must check whether demand = supply or markets clear..

and u know.. just try to plot the IC's if you can and then wrk out.. trust me.. u ll definitely get the logic behind it.. :)

i hope now u got some idea abt it.. :)

@bhaskar:

in this que , competitive euqilibrium will happen only when px=0 and py=1.. at any other prices , markets would not clear.. (try to plot the IC's)
and now facing these prices, individual 2's income or his value of enodownment is zero.. rite?
(px*X +py*Y = 0*10 + 1*0 =0 )

now u know his income is zero.. then its quite obvious he cannot demand anything.. so he would be maximisng at (0,0)
and the remaining would be demanded by individual 1 ie. (10,5) and u will see that both individuals are maximising their utility at these points and markets also clears which satisfies the conditions for competitive eq..

i hope i helped you.. :)

[nidhi]

Thanks Dear  U helped me a lot....:-)

[vaibhy]

all the above really helped but please tell how exactly do you get prices as (0.1) because i got (1.0) as the prices

[duck]

see, at (1,0) prices, markets will not clear...

plot the IC's.. u will get it.. :)