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Consider an exchange economy with two goods, good 1 and good 2, and two consumers, A and B. The preferences of the consumers can be described by a convex indifference curve. A’s initial endowment consists of 10 units of good 1 and 15 units of good 2, whereas B’s initial endowment consists of 20 units of good 1 and 5 units of good 2. Given the current price ratio p1/p2 , A would like to consume 15 units of good 1 and 10 units of good 2, whereas B would like to consume 12 units of good 1 and 15 units of good 2. Is the economy in equilibrium? If not, do you expect the equilibrium price ratio to be greater than the current price ratio? With the use of an appropriate diagram, explain your answer.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M91844339

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