6: General Equilibrium in an Exchange Economy

Question 1

monotonic preferences

Answer 1

more is better

Question 2

mutually beneficial trade

Answer 2

moving to a region that both consumers prefer to the initial allocation

Question 3

pareto efficiency

Answer 3

point where no mutually beneficial trade exists

Question 4

pareto inefficient

Answer 4

allocation of resources such that at least one person prefers an alternative allocation and no person prefers the original allocation

Question 5

pareto improvement

Answer 5

allocation such that at least one person prefers this allocation and no one prefers the original allocation

Question 6

pareto efficiency in the edgeworth box

Answer 6

characterised by tangency between indifference curves of the two consumers

MRSA=MRSB

Question 7

contract curve

Answer 7

set of all pareto efficient points in the economy

Question 8

income

Answer 8

value of a consumer’s endowment given prices

Question 9

competitive equilibrium/walrasian equilibrium/general equilibrium

Answer 9

allocation is utility-maximising for each consumer given budget constraint defined by p

total demand for each good is no greater than the total endowment
- markets clear

ALLOCATION AND A PRICE RATIO

Question 10

walras’ law

Answer 10

value of aggregate excess demand is 0 at any set of prices

if the market clears for one good, the market clears for the othe rby necessity

Question 11

FTWE

Answer 11

preferences must be locally non-satiated

market exists for all commodities which enter into production and utility functions

all markets are competitive with prices publicly known

if all the above are satisfied, then every general equilibrium involves a pareto efficient allocation
- any competitive equilibrium is pareto efficient

Question 12

why is FTWE not applicable?

Answer 12

some agents not being price-takers

no markets for some goods

markets in disequilibrium

Question 13

STWE

Answer 13

all consumers have convex preferences

all firms have convex production possibility sets

if the above are satisfied, then any allocation on the contract curve (that is pareto efficient) can be supported as a competitive equilibrium

Question 14

FTWE and STWE

Answer 14

if both theorems hold, the contract curve coincides with the set of allocations supportable as competitive equilibria

conditions under which a market economy is pareto efficient and redistribution of endowments can select among the efficient allocations

Question 15

equitable allocation

Answer 15

if no agent prefers any other agent’s bundle to their own

Question 16

fair allocation

Answer 16

allocation that is both equitable and pareto efficient

Question 17

budget slope in edgeworth box

Answer 17

p1/p2

Question 18

equilibrium

Answer 18

both consumers’ excess demand for each good balances out and equals 0

characterised by tangency between:
- consumer A’s IC
- consumer B’s IC
- budget line/price ratio

Question 19

disequilibrium

Answer 19

excess demand for both consumers doesn’t balance out to 0

point of tangency between each IC and budget line is not the same