ECON301 Lecture Notes - Lecture 7: Pareto Efficiency, Economic Equilibrium, Edgeworth Box

• School: University of Waterloo
• Department: Economics
• Course: ECON301
• Professor: Corey Van De Waal

Document Summary

Pure exchange economy example (a very quick review) Consumer a has a square root utility function ua(xa,ya) = x1/2y1/2 while consumer b has a cobb-douglas utility function ua(xa,ya) = x1/4y3/4. There is one unit of each good allocated between the two consumers according to the following endowment distribution: We solve this particular pure exchange economy as follows: At the consumer equilibrium, the two equations consumer a needs to satisfy are: Meaning we can get demands for xa and ya by subbing (3) into (2) as follows: 2 px and we know that ma = px + py is the endowment income of consumer a, so we sub this in for the ma in (4) to get: (4) (5) 2 py and we know that ma = px + py is the endowment income of consumer a, so we sub this in for the ma in (6) to get: (6)