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Microeconomics

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Moderate

Price Changes from Excess

MICRO-BGUG3E

Partners in crime Paul and Mary are in an exchange economy with initial endowment of Good 1 and Good 2 at point "O", and the price of each good is \$1. Paul's maximum utility given his endowment and prices is at $U_{Paul}$ (the blue indifference curve) and Mary's maximum utility given her endowment and prices is at $U_{Mary}$ (the red indifference curve).

With this initial endowment "O", a price of \$1 for each good, and respective utility functions, what good has excess demand and what good has excess supply?

How should the price ratio line, represented by the black line, pivot to reach the competitive equilibrium?