Re: DSE 2006

Posted by poonam on Jun 24, 2011; 11:59am
URL: http://discussion-forum.276.s1.nabble.com/Re-DSE-2006-tp6511699p6511702.html

This is how i tried to solve it .. but i have some conceptual issues... Please guide me forth.

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 ------(iii)
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 ...