Assignment 1 Market Allocations and Efficiency

1. Assignment 1Market Allocations and Efficiency prepare and answer all questions for next week seminar

2. 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