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1. Assume an exchange economy with two goods and two agents. What would nap with the vector of prices if we have an excess de
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When there is excess demand for the good 1 (horizontal line) and excess supply of good 2 ( vertical line). Then the vector of price must change to eliminate the excess supply and excess demand. The Slope of the budget line is given by -p1/p2. When there is an excess demand for good 1, the price of good 1 must rise to eliminate any mismatch between the endowment and the demand. Thus the price of good 1 rises. The excess supply of good 2 imply that the endowment is greater than what people want to buy at the given prices. This imply that the price of good 2 is high and therefore to restore equilibrium in the good 2 market the price of good 2 must fall Thus the price of good 2 falls. The slope of the new budget line will increase in absolute terms and the relative positions of the ICs of the individuals in the exchange economy will change to eliminate the mismatch between supply and demand for two goods rendering the excess demand and excess supply to be equal to zero.

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