Sun 6 Mar, 2016 06:14 am
Let two consumers have preferences described by the utility function
u^h = log(x1^h) + log(x2^h), h=1,2.
The endowments are described as follows.
Consumer 1: 3 (Good 1), 2 (Good 2).
Consumer 2: 2 (Good 1), 3 (Good 2).
a) calculate the consumer's demand functions
b) selecting good 2 as numeraire, find the equilibrium price of good 1. Hence, find the equilibrium levels for consumption.
c) Show that the consumers' indifference currves are tangential at the equilibrium.