Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 40 units of clothing but no food.Suppose each has the utility function U = F^1/2C1/2.If the price of clothing is always $1,and the food price is currently $3,then we can conclude

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The price of food will increase towards a competitive equilibrium.The farmer's marginal utility of food is 10/(2*F^(1/2)*C^(1/2)) = 5/(F^(1/2)*C^(1/2)). The farmer's marginal utility of clothing is 1/(2*F^(1/2)*C^(1/2)) = 1/(2*F^(1/2)*C^(1/2)). The tailor's marginal utility of food is 40/(2*F^(1/2)*C^(1/2)) = 20/(F^(1/2)*C^(1/2)). The tailor's marginal utility of clothing is 1/(2*F^(1/2)*C^(1/2)) = 1/(2*F^(1/2)*C^(1/2)). At the current prices, the farmer's marginal utility of food is greater than his marginal utility of clothing, and the tailor's marginal utility of clothing is greater than his marginal utility of food. This means that the farmer will want to sell more food and buy more clothing, and the tailor will want to sell more clothing and buy more food. This will drive up the price of food and drive down the price of clothing until the marginal utilities of food and clothing are equal for both the farmer and the tailor.

Consider a Society Consisting of Just a Farmer and a Tailor.The