2 consumers, suppose U2(y)U1(y), there are also two constraints, 1:U1(y1)-r1=0, U2(y2)-r2=0,...

Question

2 consumers, suppose U2(y)>U1(y), there are also two constraints, 1:U1(y1)-r1>=0, U2(y2)-r2>=0, basically it means two consumers will buy their items. 2: U1(y1)-r1>=U1(y2)-r2, U2(y2)-r2>=U2(y1)-r1, it basically means each consumer will choose his own bundle not the others. Question is to find r1* and r2*

Robert · Accepted Answer

Answer: 
u2(y) = u1(y) 
Participation constraint: 
u1(y1)-r1  0   ………….. (1) 
u2(y2) – r2  0    ……. (2) 
Incentive constraint: 
u1(y1)-r1 u1(y2)-r2  …………….. (3) 
u2(y2)-r2 u2(y1)-r1 …………………… (4)
The participation constraint is likely to bite at the equilibrium,

2 consumers, suppose U2(y)>U1(y), there are also two constraints, 1:U1(y1)-r1>=0, U2(y2)-r2>=0, basically it means two consumers will buy their items. 2: U1(y1)-r1>=U1(y2)-r2, U2(y2)-r2>=U2(y1)-r1, it...

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