Chp 10 - Competitive markets

Question 1

If firm max profit. Is that PE

Answer 1

YES! If there is no externalitets and comvex production posibility set.

Question 2

Name one thing that is important to hold for the second WF theorem to hold?

Answer 2

Production function needs to be convex.

Question 3

State first and second welfare theorems.

Answer 3

First welfare theorem: If the price p∗ and the allocation (x∗, q∗) constitute a competitive equilibrium, then this allocation is Pareto optimal given that agents have locally non-satiated preferences. Simplified, it means that the market will allocate commodities in a Pareto optimal way, i.e., there is no room for a social planer in a competitive equilibrium.

Second welfare theorem: If preferences are convex and locally non-satiated, any Pareto optimum can also be a competitive equilibrium given an initial set of endowments. That is if there exists a Pareto optimal point in the economy that is not reachable given the initial endowment, these endowments can be redistributed to create a new budget line from which agents then can trade and so they end up at the new Pareto optimal point.