Q1. General Equiliubrium-Pure Exchange Economy

Suppose A and B live in an exchange economy with two goods x1 and x2. Aowns 50 of both goods, and B own 250 of both goods.A's tastes are captured by the utility functionuA(x1,x2) = x2 + 50lnx1 and B's are captured by the utility functionuB(x1,x2) = x2 + 100lnx1.

a. Let the competitive equilibrium prices be p1 and p2 respectively.Derive both consumers' demand functions for both goods.

b. Find the relationship between p1 and p2 in equilbirum. How muchof each good will each consumer choose?

c. Suppose the government transfers 100 units of B's good 1endowment to A. How will the consumers' choices of good 1 in competitiveequilibrium change? Explain. (You should answer without repeating the utilitymaximization calculations.)