please only answer part ii Question 1Consider an economy with two goods t = 1,2. Whenever an individual consumes ₁ units of good 1 and₂ units of good 2, their utility is given byu(x₁, x2) = aln x₁ + ln x2,where a > 0 is a free parameter.(i) How does the parameter a affect the marginal rate of substitution between goods 1 and 2? Explainintuitively how does the relative preference for goods 1 and 2 change as the parameter a increases. Consider an exchange economy with two consumers, A and B, whose utilities are given as above. How-ever, the parameter a is higher for consumer A than for consumer B, i.e., we have a > a³. ConsumerA is endowed with 3 units of good 1, but has no endowment of good 2. Consumer B has no endowmentof good 1, but has 3 units of good 2. In the remainder of this question, let p denote the price of good 1and let the price of good 2 be normalised to 1.(ii) Find the competitive equilibrium price p and the equilibrium allocation expressed as a function ofthe parameters aª and a³. Which good is consumed in greater amount by consumer A? Whichgood is consumed more by agent B? Interpret your results in relation to your answer in part (i).

We must resolve the utility maximization problem for both consumers, taking into account their…

Answered: Find the competitive equilibrium price…

Business

Economics

Find the competitive equilibrium price p and the equilibrium allocation

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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