Problem Set 2

Question 1

How do you find optimal demands?

Answer 1

• Find the MRS and equal it to the price ratio
• Find an expression for P1XA1 or P2XA2 and substitute this into the budget constraint.
• When you sub this back into the BC makes XA1 and XA2 this subject to find the optimal demands

Question 2

How do you show something satisfy walras law

Answer 2

Walras Law states: P1(XA1 + XB1 - 1(endowment)) + P2(XA2 + XB2 -1)=0