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In this assignment, you will explore the concepts of market allocations and efficiency through the lens of Anne and Bill's utility function, which reflects their shared preferences for two goods. You will create diagrams to illustrate Pareto-optimal consumption bundles and the associated utilities. Discuss the implications of initial endowments on competitive equilibrium and the potential role of government intervention in achieving egalitarian outcomes. Additionally, state the first and second theorems of welfare economics to deepen your understanding of market efficiency.
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Assignment 1Market Allocations and Efficiency prepare and answer all questions for next week seminar
Questions • Anne and Bill are endowed with two goods and share the same preferences, represented by the following utility function: • Show in a diagram the set of Pareto-optimal consumption bundles for Anne and Bill. Explain carefully your reasoning. • Draw in a diagram the utility associated with all the Pareto-optimal consumption bundles you described in the previous question and indicate the egalitarian utility outcome • Suppose that, given the two initial endowments and the initial prices, the competitive equilibrium would be such that Anne would receive a much higher utility than Bill. Can the government intervene to restore the egalitarian outcome where Anne and Bill would achieve the same utility? Explain your answer. • State the first and second theorem of welfare economics
