General Equilibrium

Question 1

General equilibrium consists of

Answer 1

2 person 2 good economy

Question 2

Edgeworth box use

Answer 2

Show exchange of goods between 2 people

Question 3

Example. Assume 2 goods are not owned by anyone.

2 people Amy and Ben
10kg coffees (x) and 15gb data (y) between them.

First rule to consider:

Answer 3

If at least one of them like coffee AND data, don’t throw any goods away

Question 4

𝑥̅ = total kg of coffee
𝑦bar. = total GB of data

When is an allocation feasible? (as an expression)

Answer 4

Xa + Xb ≤ 𝑥̅

𝑦a + yb ≤ 𝑦.

Edgeworth box only shows bundles fully exhaust total supply (NO WASTE)

Question 5

Edgeworth box: every point in the box is…

Answer 5

A feasible allocation that uses all of the goods. (Fully exhausts the supply)

Question 6

What are the directional interests to get a high quantity of both goods for A and B?

Answer 6

A is upward right (high lots of X and Y)
B is downward left (high lots of X and Y)

Opposite direction, causing a conflict of interest.

Question 7

How is A and B’s indiviudal utility function expressed

Answer 7

Almost like a cobb douglas for utility

Question 8

Identical preferences vs Different preferences

(Use αA taken from 1-α)

Answer 8

Identical αA = 1/2 and αB= 1/2 (player A and B have same preference)

Different preferences αA=2/3 αB=1/3

Question 9

How do we show the indifference curves in an edgeworth box

Answer 9

Flip one of the indifference maps 180 degrees to make the box

Question 10

Pg 61 - Why is z not pareto efficient

Answer 10

Different slopes so different MRS.

MRS represents different willingness’ to pay, and a Pareto-improving allocation has not been realised.

Question 11

What is pareto efficient

Answer 11

When indifference curves are tangent to each other (equal slopes)
MRSa=MRSb