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Linus Straight S Utility Function Is U A B A

Linus Straight's utility function is U(a, b) = a + 2b, where a is apples and b is bananas. Lucy Kink's utility function is U(a, b) = min{a, 2b}. Lucy initially has 12 apples and no bananas, while Linus has 12 bananas and no apples. The Edgeworth box diagrams their initial endowments and indifference curves. To find the competitive equilibrium, we set up two equations: the budget constraint for Linus and equality of total supply and demand for each good. Solving these equations reveals the competitive equilibrium quantities consumed.

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205 views1 page

Linus Straight S Utility Function Is U A B A

Linus Straight's utility function is U(a, b) = a + 2b, where a is apples and b is bananas. Lucy Kink's utility function is U(a, b) = min{a, 2b}. Lucy initially has 12 apples and no bananas, while Linus has 12 bananas and no apples. The Edgeworth box diagrams their initial endowments and indifference curves. To find the competitive equilibrium, we set up two equations: the budget constraint for Linus and equality of total supply and demand for each good. Solving these equations reveals the competitive equilibrium quantities consumed.

Uploaded by

trilocksp Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Solved: Linus Straight s utility function is U a b a

Linus Straight s utility function is U a b a

Linus Straight’s utility function is U(a, b) = a + 2b, where a is his consumption of apples and b is
his consumption of bananas. Lucy Kink’s utility function is U(a, b) = min{a, 2b}. Lucy initially has
12 apples and no bananas. Linus initially has 12 bananas and no apples. In the Edgeworth box
below, goods for Lucy are measured from the upper right corner of the box and goods for Linus
are measured from the lower left corner. Label the initial endowment point on the graph with the
letter E. Draw two of Lucy’s indifference curves in red ink and two of Linus’s indifference
curves in blue ink. Use black ink to draw a line through all of the Pareto optimal allocations.

(a) In this economy, in competitive equilibrium, the ratio of the price of apples to the price of
bananas must be ____________

(b) Let aS be Linus’s consumption of apples and let bS be his consumption of bananas. At
competititive equilibrium, Linus’s consumption will have to satisfy the budget constraint, as +
________ bS = ________ This gives us one equation in two unknowns. To find a second
equation, consider Lucy’s consumption. In competitive equilibrium, total consumption of apples
equals the total supply of apples and total consumption of bananas equals the total supply of
bananas. Therefore Lucy will consume 12 ? as apples and _________ ?bs bananas. At a
competitive equilibrium, Lucy will be consuming at one of her kink points. The kinks occur at
bundles where Lucy consumes __________ apples for every banana that she consumes.
Therefore we know that 12?as/12?bs = _________

(c) You can solve the two equations that you found above to find the quantities of apples and
bananas consumed in competitive equilibrium by Linus and Lucy. Linus will consume _______
units of apples and ________ units of bananas. Lucy will consume _________ units of apples
and 3 units of bananas.

Linus Straight s utility function is U a b a

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