Universitat Pompeu Fabra, 1996/1997
Due May 7, 1997.
Consider an economy with two individuals and two commodities.
The preference relation of one individual is represented by the utility
function U1(x,y)=x+y, and of the second individual by the
utility function U2(x,y)=a(x+2y), where a>0.
- Draw the Edgeworth box when the total resources are (2,2).
- Draw the set of possible utility pairs for a=1.
- What is (or are) the "social optimum" (or optima) recommended by the
Social Welfare Function W=u1+u2. What allocations
(in the Edgeworth box) correspond to this optimum (or optima)?
- Repeat exercises 2 and 3 above for a=4.
- Find in the Edgeworth box a Pareto efficient allocation that
corresponds to a price equilibrium in which the incomes of both
individuals are equal. (Hint: if the endowments of both individuals
are equal, so their incomes are). Find the corresponding utility pair in
the drawing of possible utility pairs when a=4.
- What would you consider as a social optimum for this economy?
Why? (Here you are asked for your personal opinion; you have to reason it,
but not necessarily on the material discussed in class or in this problem
set). Do not write more than 10 lines.