Author Question: Andrew and Sarah are two traders in a pure exchange economy with two goods, Bikes and TVs. Suppose ... (Read 52 times)

luvbio · **on:** Jul 1, 2018

Andrew and Sarah are two traders in a pure exchange economy with two goods, Bikes and TVs. Suppose Andrew has preferences given by: U(B,T) = BT where B is the number of bikes and T is the number of TVs.

Sarah only derives utility from TV, so her utility function can be given by: V(B,T) = T Describe the contract curve.

Question 2

You invest an amount today for four years that pays 6 annually. The bank compounds annually. At the end of the four years you will have 150. What amount must you invest today?

A) 148.81
B) 138.81
C) 128.81
D) 118.81

Yixagurpuldink · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

The contract curve will be points where Sarah consumes zero Bikes. Notice that any bundle in which Sarah's consumption of TVs is positive is Pareto dominated by the same bundle but with the quantity of Bikes reduced to zero.

Answer to Question 2

D