Re: DSE Q.NO-34 2010

Posted by Arun on Jun 22, 2011; 7:28am
URL: http://discussion-forum.276.s1.nabble.com/DSE-Q-NO-34-2010-tp6502921p6503237.html

Even i had some confusion over this question.My line of reasoning is

1)Initial allocation is not competitive equilibrium as it is not pareto efficient because allocation (2,1) (0,0) is possible which increases Agent 1 utility and keeps Agent 2 utility constant.


2)A competitive equilibrium should be pareto efficient.Allocation (2,1) (0,0) could have been a competitive equilibrium but its not reachable.Agent 2 wont trade 'x' at a price zero.Therefore given the initial distribution and preferences no trade is possible and initial distribution is not pareto efficient so the result is a empty set.


I am not very confident so it would be preferred that someone could verify the above reasoning.