2. Achievement of the market system

Question 1

Is there production in an exchange economy?

Answer 1

No

Question 2

What is the impact of productivity on welfare allocation?

Answer 2

Productivity increase impacts welfare allocation

Question 3

General competitive equilibrium (GCE)

Answer 3

• Described by a vector of prices and a consumption bundle for each consumer (allocation) such that:
• Every consumer maximises utility given prices (Derivative = 0), and
• Market clears: The ttoal demand for each commodiit just eqals the aggreaget endowment (Demand = Supply)

Question 4

What are the dimensions of the box?

Answer 4

Supply

Question 5

Non satiation

Answer 5

Consumers enjoy more consumption, no maximum

Question 6

General equilibrium in a competitive exchange economy

Answer 6

Question 7

Solving for the GCE in an endowment economy

Answer 7

Question 8

What if there are many consumers of different types

Answer 8

Question 9

What is the Lagrangian optimisation?

Answer 9

Question 10

How do the Lagrangian optimisation

Answer 10

Question 11

Step by step of GCE in an exchange economy

Answer 11

Question 12

Example: Step 1 write down the budget constraint for each consumer

Answer 12

Question 13

EXAMPLE
Step 2: Write down each consumer’s constrained optimisation problem

Answer 13

Question 14

EXAMPLE
Step 3: Use the Lagrangian method to find consumer demands

Anna

Answer 14

Question 15

EXAMPLE
Step 3: Use the Lagrangian method to find consumer demands

Bilab

Answer 15

Question 16

EXAMPLE
Step 4: Solve the market clearing condition(s) to find GCE price(s).

Answer 16

Question 17

EXAMPLE
Step 4: Solve the market clearing condition(s) to find GCE price(s).
• Let’s confirm Walras Law by examining the market for good 𝑌

Answer 17

Question 18

EXAMPLE
Step 5: Find the GCE allocation

Answer 18

Question 19

EXAMPLE

Edgeworth Box

Answer 19

Question 20

EXAMPLE
Step 6: Find consumer welfare at the GCE

Answer 20

Question 21

EXAMPLE
GCE value
What if there is no GCE equilibrium?

Answer 21

Question 22

EXAMPLE

What if there are no prices at which demand equals supply in every market?

Answer 22

Question 23

Will a GCE exist?
• Condition for existence

Answer 23

Question 24

First fundamental welfare theorm

Answer 24

Question 25

Policy implications of the first welfare theorem

Answer 25

Question 26

The second fundamental welfare theorem

Answer 26

Question 27

Policy implications of the second welfare theorem

Answer 27

Question 28

Answer 28

Question 29

Why is convexity important?

Answer 29

Question 30

Can equity and efficiency be separated in practice?

Answer 30

Question 31

Endogenous Edgeworth Box

Answer 31

Price changes = Changes in the dimension of the box
Production can vary in response to prices.

Question 32

The distribution of ‘talent’
Investing labour income

Answer 32

Question 33

The distribution of ‘talent’
How much do labourers earn?

Answer 33

Question 34

The distribution of ‘talent’
Production of goods

Answer 34

Question 35

Consumption and labour supply

Answer 35

Question 36

CONSUMPTION AND LABOUR SUPPLY EXAMPLE:

Answer 36

Question 37

CONSUMPTION AND LABOUR SUPPLY EXAMPLE:

Step 1: write down the budget constraint for each consumer

Answer 37

Question 38

CONSUMPTION AND LABOUR SUPPLY EXAMPLE:

Step 2: Write down each consumer’s constrained optimisation problem

Answer 38

Question 39

CONSUMPTION AND LABOUR SUPPLY EXAMPLE:

Step 3: Use the Lagrangian method to find consumer demands
ANNA

Answer 39

Question 40

CONSUMPTION AND LABOUR SUPPLY EXAMPLE:

Step 3: Use the Lagrangian method to find consumer demands

BILAL

Answer 40

Question 41

CONSUMPTION AND LABOUR SUPPLY EXAMPLE:

Step 4: Solve the market clearing condition(s) to find GCE price(s).

Answer 41

Question 42

CONSUMPTION AND LABOUR SUPPLY EXAMPLE:

Step 5: Find the GCE allocation

Answer 42

Question 43

Summarise how consumer spending habits changed in the UK during the pandemic. How have they evolved since the lifting of restrictions?
(ONS, 2021)

Answer 43

• Clothing, electrical housing appliances, sports equiptment, games and toys which are still being bought online more with the lifting of restrictions
• Inflation and cost of living has reduced the amount of food people are buying
• Online internet sales in May 2022 is 26.6% but in February 2020 it was 19.7%
• Switching to cashless transactions
• People took up hobbies so there were more purchases of things like gardening items and pets

Question 44

Is it plausible to think that there will be a reversion back to the pre-pandemic shopping habits? If not, why not?
(ONS, 2021)

Answer 44

• Shifiting towards shopping in store despite online shopping remaining high