Consider an economy with two consumers(A and B) and one good X. There are two st
ID: 1096519 • Letter: C
Question
Consider an economy with two consumers(A and B) and one good X. There are two states of the world, the probability of each state is 1/2. The utility of both consumers takes the form
Both consumers maximise expected utility.
(a) Assuming that the endowment of A is 2 in state 1 and 1 in state 2, and that of B is 1 in state 1 and 2 in state 2, drive the competitive equilibria of this economy.
(b) Show that if -keeping B's endowment the same- we increase A's endowment in one of the states, B will be worse off.
(Note: This exercise could alternatively be understood in an insurance setting.)
u (Xi) = VX, ie(1.2)Explanation / Answer
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