General equilibrium

Question 1

What is GCE

Answer 1

General in that there are many firms, households and goods (a complete set of markets) Competitive in that all firms and households are price takers Equilibrium is reached by all agents making privately optimal decisions.

Question 2

Conditions for GCE

Answer 2

1) All consumers privately optimising 2) All firms privately optimising 3) System is closed by households staking shares in firms profits 4)Supply equals demand for each good

Question 3

Walras law and an implied result

Answer 3

If each individual satisfies budget constraint so that their sales equals their purchases, the total value of all sales will equal purchases Hence excess demand = 0 and equilibrium in n-1 markets means equilibrium in the last

Question 4

The Edgeworth Hypothesis

Answer 4

1) two individuals will trade if makes one better off and no-one worse off 2) neither individual will agree to a trade which makes him/her worse off

Question 5

Price ratio implied by a final point e

Answer 5

d

Question 6

Describe the specific factors model

Answer 6

• Two industries
• One common factor of production - fixed supply
• Two specific factors (one in each industry)
• Slope of the PRF is MRT

Question 7

Specific factors model with trade

How does the graph look?

Answer 7

Keep same PPF. Now have new price line (world prices) and new indifference curve (consumers preferences with trade)

Question 8

What is comparative advantage

Answer 8

Measured in terms of opportunity cost. An economy has CA in that good which for it is relatively cheaper in autarky than free trade.

Free trade increases the return to the CA specific factor

Image shows CA in good 1

Question 9

Conditions for efficient allocation

Answer 9

Question 10

Quasi-linear preferences

Answer 10

• Have no income effect
• No matter endowment there is the same relative price
• Will only demand good y up until certian point