Final, Vocab

Question 1

Competitive Equilibrium

Answer 1

An equilibrium condition where the interaction of profit-maximizing producers and utility-maximizing consumers in competitive markets with freely determined prices will give rise to an equilibrium price. At this equilibrium price, the quantity supplied is equal to the quantity demanded.
While the basic supply and demand model is based on individual consumer and firm behavior, the competitive equilibrium model is based on the behavior of aggregate consumers and firms in competitive markets. It can be used to predict the equilibrium price and total quantity in the market, as well as the quantity consumed by each individual and output per firm.

Question 2

Pareto Domination

Answer 2

Through “feasible alternatives”: Option A Pareto-dominates alternative B if nobody prefers B to A and at least one person prefers A to B.

Question 3

Pareto Eff.

Answer 3

Feasible alternative A is Pareto efficient if no feasible alternative Pareto dominates A.

Question 4

Computing Demand

Answer 4

Demand is calculated MRS = v’(x) = p

Question 5

Production Efficiency

Answer 5

Endowment w = Mb + Mr + C(Xb + Xr)

Question 6

Utility Possibility Function (UPF)

Answer 6

UPF = Ub^2 + Ur^2 = S(Xb,Xr) + w

Question 7

Social indifference curves of a Utilitarian Social Welfare Function.

Answer 7

The social indifference curves of a utilitarian social welfare function are straight lines
with a slope of -1. Due to the symmetry of the UPF, the utilitarian maximum occurs at the point where UB = UR.

Question 8

Social indifference curves for the Maximin Social Welfare Function.

Answer 8

The maximin SWF displays L-shaped indifference curves with kinks on the 45° line, along which UB = UR. Hence, the equal-utility point on the UPF yields the maximin maximum.

Question 9

Nash Social Welfare Function

Answer 9

A Nash SWF has the standard Cobb-Douglas indifference curves (semi-circle shape). Again, due to the symmetry of the problem, the max occurs at the equal utility point on the UPF

Question 10

First fundamental Theorem of Welfare Economics

Answer 10

Under the following conditions:
Absence of externalities
Absence of public goods
Symmetrical (not necessarily perfect) information.

The allocation obtained at a general competitive equilibrium is efficient.

Question 11

Samuelson Condition

Answer 11

The sum of the individual marginal valuations (MRS) is equal to the marginal cost.

Question 12

Conditions for Eff.

Answer 12

Max Surplus

In the case of a private good, surplus maximization requires the two equalities

o vB’(XB) = C’(XB + XR)
o vR’(XR) = C’(XB* + XR*)

In the case of a public good, it requires the single equality

(Samuelson Condition) vB’( x) + vR’( x) = C’(x*).

No waste of numeraire

mB + mR + C(x) = ω.

Question 13

Lindahl Decision Making

Answer 13

Vr’ (x) = ( Sr * c ) / Ir

and

Vp’ (x) = [(1 - Sr)*c ] / Ip

Where Sr is the portion paid by rich, c is the parameter from C(x) = c*x and I is the number of individuals in each group.

Question 14

Net Valuation

Answer 14

Bi = Vi - ti

Insofar as when calculating someone’s stance on a tax. Subtract their valuation of the project from the cost of the tax.

Question 15

Median Voter

Answer 15

A median voter is defined as a person whose net valuation is the median one. To find the median net valuation it is helpful to draw a graph of the 50 people in this town and their valuations, ordered by decreasing net valuation.

Question 16

Voting Efficiency?

Answer 16

The outcome will be efficient if the mean net valuation (or equivalently, the sum of the net valuations, weighted by family size) is positive.

Question 17

Dominant Strategy Equilibrium

Answer 17

A combination of strategies, one for each player, is called a (strictly) dominant strategy equilibrium if the strategy played by any given player yields her a higher payoff than any other of the strategies available to her no matter what other players play (whether they play their equilibrium strategies, or any other strategy).Most games have a Cournot-Nash equilibrium, but only very special games have a dominant strategy equilibrium.

Question 18

Cournot-Nash equilibrium

Answer 18

A combination of strategies, one for each player, is called a Cournot Nash equilibrium if the strategy played by any given player yields her a higher (or at least no lower) payoff than any other of the strategies available to her, when all the other players play their equilibrium strategies

Question 19

Voluntary Contribution Amounts vs. Efficient Contribution (Samuelson)

Answer 19

Voluntary Cont: V’ = C’

Samuelson: sum V’ = C’(x)

Question 20

ex ante efficiency

Answer 20

In the presence of enough risk-neutral agents, ex ante efficiency requires all risk-averse people to be fully insured

Question 21

actuarial fairness

Answer 21

We say that an ex ante risk sharing system, or insurance contract, is actuarially fair if, for every participant, the expected net transfer is zero.
Actuarial fairness is synonymous with the absence of ex ante redistribution. It is in the nature of risk sharing arrangements that they are made ex ante, before the random event occurs, and that they result in an ex post transfer or redistribution from lucky to unlucky. Implementing an actuarially fair scheme does require an ex post redistribution.

Question 22

Calculating Insurance Premiums

Answer 22

sum of [(risk1)(loss)+ (risk2)(loss)] = premium

payments are paid out ex - post, to equalize all parties wealth.

Question 23

Lindahl Model

Answer 23

Parlimentary negotiation between two parties in a democratic system. (Rich / Poor)

Ir Vr’ (X) + Ip Vp’ (X) = c = C’(x*)

Question 24

What do we mean by efficient risk sharing?

Answer 24

Efficient risk sharing is equivalent to ex ante efficiency in the presence of uncertainty, i. e., if a risk sharing agreement is efficient, then it is impossible to make further agreements that make everybody ex ante better off.

Question 25

What does efficient risk sharing imply in the absence of aggregate risk?

Answer 25

In the absence of aggregate risk, total consumption is the same in every state of nature. This graphically corresponds to a square Edgeworth box. In that case, efficient risk sharing when consumers are risk averse implies that nobody bears any risk: any point in the diagonal of the square Edgeworth box corresponds to an ex ante efficient allocation. i. e., to efficient risk sharing