Re: DSE 2006 - Q 23

Posted by poonam on Jun 24, 2011; 3:20am
URL: http://discussion-forum.276.s1.nabble.com/DSE-2006-Q-21-22-23-tp6503619p6510785.html

With respect to Q23:
Using the competitive equilibrium approach and taking no numeraire, because there is an additional relation in the question.
we get M1=5*p_2
          M2=10*p_1

Dx_1 = Dy_1= M1/(p_1 + P_2)= M1

similarly, Dx_2 = Dy_2 = M2

so we get Dx_1 + Dx_2 = 10  -------(i)             and Dy_1 + Dy_2 = 5   ---------(ii)
the above two equations simultaneously have no solution.
solving each with p_1 + p_2 =1
we get two set of prices : (1,0) { from (i) and (iii) }
                                     (0,1) { from (ii) and (iii) }

Now what ???
how do we choose between the two ??

And this is when we try to solve it like this, if we use the numeraire approach, then the plain choice of numeraire gives us two different answers. What is the criteria to choose ?
Please let me know ...