Limited access

Upgrade to access all content for this subject

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?
Select Option Good 1 has excess demand, good 2 has excess supply.Good 1 has excess supply, good 2 has excess demand.Good 1 and good 2 have excess demand.Good 1 and good 2 have excess supply.
How should the price ratio line, represented by the black line, pivot to reach the competitive equilibrium?
Select Option The price ratio line needs to pivot clockwise, making the line steeper.The price ratio line needs to pivot counter-clockwise, making the line flatter.The price ratio line does not need to pivot, equilibrium can be reached at these prices.
Select an assignment template