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Question 2. (20 marks) Consider a model of a negative consumption externality. Households have strictly...

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Question 2. (20 marks) Consider a model of a negative consumption externality. Households have strictly convex preferences over composite ( , respectively) and a level of activity chosen by household A measured by 0 100. The households utility functions are ( ,) = ( 10) 1/2 ( 10) 1/2 and ( ,) = 1/2 (100 ) 1/2 Suppose the initial endowment of composite is = 30 and = 70. Laws currently restrict Household As activity, to the legal maximum is 0 Question 2. (20 marks) Consider a model of a negative consumption externality. Households have strictly convex preferences over composite (x4, xrespectively) and a level of activity chosen by household A measured by 0 Sts 100. The households' utility functions are U^(x^,t) = (x - 10)1/2(t-10)/2 and UP(x,t) = x1/2(100 t)/2 Suppose the initial endowment of composite is e^ = 30 and e = 70. Laws currently restrict Household A's activity, to the legal maximum is 0

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