Asked by Ramon Gonzalez on Jun 06, 2024
Verified
Abduls utility is U(X A, Y A) minX A, Y A, where X A and Y A are his consumptions of goods X and Y respectively.Babettes utility function is U(X B, Y B) X B Y B, where X B and Y B are her consumptions of goods X and Y.Abduls initial endowment is no units of Y and 5 units of X.Babettes initial endowment is no units of X and 11 units of Y.If X is the numeraire good and p is the price of good Y, then supply will equal demand in the market for Y if
A) 11/(p 1) 2.50 11.
B) 5/(p 1) 5.50 11.
C) 11/5 p.
D) min5, 11 5/2p 11.
E) min5, 11 11/2p 11.
Utility Function
A mathematical representation expressing an individual's preference ordering over a set of goods or services, used in economics to model decision making under uncertainty.
Min
Often short for "minimum," it represents the smallest or least possible amount or degree of a certain quantity or measure.
Numeraire Good
A benchmark or standard commodity against which the relative price of all other goods and services is measured in an economy.
- Identify conditions for supply and demand equilibrium in a market.
Verified Answer
To find the equilibrium condition in the market for good Y, we need to equate the quantity demanded and quantity supplied of good Y.
Abdul's demand for good Y is given by the marginal rate of substitution:
MRS(A) = dYA/dXA = -MUx/MUy = p
where MUx and MUy are the marginal utilities of goods X and Y respectively.
Substituting Abdul's utility function, we get:
p = -d(U(A))/d(YA) / d(U(A))/d(XA) = -10YAXA^-2
Similarly, Babette's demand for good Y is given by:
p = -d(U(B))/d(YB) / d(U(B))/d(XB) = XB / YB
At the equilibrium, total demand for good Y = total supply of good Y
That is, p(QA + QB) = 11, where QA and QB are the quantities of good Y demanded by Abdul and Babette respectively.
Substituting the demand functions derived above, we get:
p(-10XAA^-2 + QB / YB) = 11
Substituting Abdul's initial endowment (XA = 5, YA = 0) and Babette's initial endowment (XB = 0, YB = 11/p), we can solve for the equilibrium price of good Y:
p = 11 / (5/1 + 11/p) = 5.5
Substituting p = 5.5 in either Abdul's or Babette's demand function for good Y, we can solve for the quantities demanded by Abdul and Babette:
QA = 5 / (5.5) = 10/11
QB = (11/p) / (1 + (XB / YB)) = 11 / (1 + (5.5 / 11)) = 6/11
Therefore, supply will equal demand in the market for Y if Abdul demands 10/11 units of Y and Babette demands 6/11 units of Y. The only answer choice that matches this is B.
Learning Objectives
- Identify conditions for supply and demand equilibrium in a market.
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