Economics代写|Public Finance澳洲代写

Answers to Assignment 1
1a. See Figure 1a:
• The box is 5 by 7, reflecting the total endowments of goods 1 and 2. • Given their preferences, the households’ indifference curves are linear.

In Figure 1a, Household 1’s indifference curves are blue while those of Household 2 are red.
• The Pareto efficient allocations are along the bottom and right edges of the box.

1b. Consider allocation A in Figure 1a. Allocation A is not Pareto efficient, because allocation A’ is Pareto superior to it. Household 2 is indifferent between the two allocations, but Household 1 strictly prefers allocation A’ as it lies on a higher indifference curve.

1c. No, the endowment is not an efficient allocation. In the Figure, the endowment is depicted by Ω. It can be seen that it is possible to make both households better off by moving to another allocation (actually to many other allocations) within the box. In the picture, allocation A’ is Pareto superior to the endowment (Ω), as it lies on a higher indifference curve for Household 2, while Household 1 is indifferent between it and the endowment.

1d. No, households’ marginal rates of substitution are not equal at the Pareto efficient allocations. In fact, the two households’ marginal rates of substitution differ at every allocation in the box. To see this note that: