Demand function in Edgeworth box econothe

economicsfinance

Show in Edgeworth box economy, where

$\omega_1=(3,3), u_1(x_1,x_2)=x_1+2x_2,\omega_2=(4,1),
> u_2(x_1,x_2)=x_1+x_2$

that the following functions determine demand function of agents

($\lambda\in[0,1]$ for both)

$x_1=\left\{\begin{matrix} (\frac{3p_1+3p_2}{p_1},0) & , p_2>2p_1\\
\lambda(\frac{3p_1+3p_2}{p_1},0)+(1-\lambda)(0,\frac{3p_1+3p_2}{p_2})
& , p_2=2p_1 \\ (0,\frac{3p_1+3p_2}{p_2}) & , p_2<2p_1
\end{matrix}\right.$

$x_2=\left\{\begin{matrix} (\frac{4p_1+p_2}{p_1},0) & , p_2>2p_1\\
\lambda(\frac{4p_1+p_2}{p_1},0)+(1-\lambda)(0,\frac{4p_1+p_2}{p_2}) &
, p_2=2p_1 \\ (0,\frac{4p_1+p_2}{p_2}) & , p_2<2p_1
\end{matrix}\right.$

Also prove that Walras equbilibrium is $p_1<p_2<2p_1$

I know how to draw Edgeworth box, but I'm not sure how to prove $x_1,x_2$, but I am completely lost how to determine demand functions for agents.

Any help?

Best Answer

Suppose that $w_1^1$ and $w_2^1$ denote the endowments of agent $1$. And $x_1$ and $x_2$ the corresponding demands. Then the budget restriction for this agent is

$$p_1x_1+p_2x_2\leq p_1w_1^1+p_2w_2^1$$

Next we use the information about the endowments of agent 1: $w^1=(3,3)$

$$p_1x_1+p_2x_2\leq p_1\cdot 3+p_2\cdot 3$$

At the first interval no demand for good 2. That means that $x_2=0$.

$$p_1x_1\leq p_1\cdot 3+p_2\cdot 3\Rightarrow x_1\leq \frac{p_1\cdot 3+p_2\cdot 3}{p_1}$$

Agent $1$ want $x_1$ only (no $x_2$) if $\Large{\frac{\frac{\partial U1}{\partial x_1}}{\frac{\partial U_1}{\partial x_2}}}>\frac{p_1}{p_2}\normalsize\Rightarrow \frac{1}{2}>\frac{p_1}{p_2}\Rightarrow p_2>2p_1$. This is the first part of the interval. I think you can deduce the other intervals.

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