UNIVERSIDAD CARLOS III, MICROECONOMIC THEORY, QUIZ 1 (A) SOLUTION, October 17, 2018

You can use a pencil and both sides of pages. You have 30 minutes.
Consider an economy with two goods, X and Y , and two consumers, A and B. Consumers’ ` ˘ utility functions are
UA pxA , yA q “ pxA ` 2q pyA ` 2q and UB pxB , yB q “ xB ` yB and total endowments are X, Y “ p10, 16q.
1. Find the set of Pareto efficient allocations and draw it in the Edgeworth box.
Solution. Interior efficient allocations: tpxA , yA , xB , yB q : xA “ yA , xA ` xB “ 10, yA ` yB “ 16u. Corner
efficient allocations: tpxA , yA , xB , yB q : 10 ă yA ă 16, xA ` xB “ 16, yA “ 0, yB “ 10u together with the
allocations pxA , yA , xB , yB q “ p0, 0, 10, 16q and pxA , yA , xB , yB q “ p10, 16, 0, 0q.

2. Suppose that initial endowments are pxA , y A q “ p0, 10q and pxB , y B q “ p10, 6q. Find Walrasian equilibrium
prices and allocation and represent them in the Edgeworth box.
Solution. Depicting the IC of both consumers (A in dark blue, B in green) it is clear that the C.E. will be a
P.O. interior solution. Therefore
A B px
M RSxy “ 1 “ M RSxy “ .
py
Given this equilibrium orice ratio, one can obtain the following W.E. tpxA , yA , xB , yB , px {py q “ p5, 5, 5, 11, 1qu.

3. Suppose that initial endowments are pxA , y A q “ p10, 11q and pxB , y B q “ p0, 5q. Find Walrasian equilibrium
prices and allocation and represent them in the Edgeworth box.
Solution. This allocation is already efficient, thus we only need to find prices consistent with this allocation
being a C.E. Since the solution is interior for Agent A, we must have
A yA ` 2 11 ` 2 px
M RSxy “ “ “ 1.083 “ .
xA ` 2 10 ` 2 py
The W.E. is then given by tpxA , yA , xB , yB , px {py q “ p10, 11, 0, 5, 1.083qu.
All the results are represented in the following figure

x˚B 0B
16
Corner
P.O. allocations

Initital
Endowment
and C.E. (Ex.3)
Initial
Endowment (Ex.2)

C.E. (Ex.2)
px
py “ ´1.083

˚ ˚
yA yB
Interior
P.O. allocations

px
py “ ´1

0A x˚A 10