Micro part 1 Flashcards
Formal Defintion of cournot equiblrium with SOLE OWNERSHIP
Coutnot equiblrium is a list of supplies (q1,q2,q3….,qn) such that every firm maximises profits taking supplies of other firms as fixed.
Formal Defintion of cournot equiblrium with COMMON OWNERSHIP
-Coutnot equiblrium is a list of supplies(q1…qn) such that every firm maximises the weighted sum of profits . where weights are given by the representative shareholder
The Cournot equilibrium happens when no firm wants to change its quantity of production given what the others are doing.
describe differences in characteritics with sole ownership in the cournot model
Sole Ownership:
-Firms maxmise independent profits
-Firms act independently to maximize individual profits.
-Higher market output and lower prices due to competition.
-Shareholders wish for firm to max profits.
Common Ownership:
-firms/shareholders aim to maximize the sum of their weighted profits rather than individual. Since the firms are under the same ownership , their output decisions are coordinated to maximize joint profits,considering all firms decisions
-Dividend of the representative shareholder in firm i can depend negatively or positively on the supply in firm k
- Firms aim at maximising dividend of the representative shareholder.
-Lower market output and higher prices, resembling a monopoly.
Reduced competition as firms act cooperatively.
Describe characterisitcs with common ownership in the cournot model
Common Ownership:
-firms/shareholders aim to maximize the sum of their weighted profits rather than individual. Since the firms are under the same ownership , their output decisions are coordinated to maximize joint profits,considering all firms decisions
-Dividend of the representative shareholder in firm i can depend negatively or positively on the supply in firm k
- Firms aim at maximising dividend of the representative shareholder.
-Lower market output and higher prices, resembling a monopoly.
Reduced competition as firms act cooperatively.
Define Pareto optimal allocation and feasible outcome + when in edgeworth box + equilbirum with the edgeworth box
Feasible allocations specificy how much of the two goods both consumers consume, with the amount of both goods being positive and the market clears (xa1 + xa2 + xb1 + xb2 = w1+ w2) consumption = expenditure.
-Pareto optimal allocation is a feasbile allocation such that impossible to make one individual better off without making someone else worse off. Is an allocation such that no other feasible allocation exists which provides a higher utility . (when indiffernce curves are tangent)
-Pareto optimal is effieint but doesnt imply fairness.
-Consumers maximise utility and markets clear (endowmnets = consumptions). ALL Consumers maxmise a untiltiy function st to a constraint, lagrange
State the first welfare therom + limitations of the first welfare theorm
-The First Welfare Theorem states that a equilibrium allocation is Pareto efficient, without precence of market failures. Suggests interventions can be justfied in terms of equity considerations.
-If there is an allocation of the goods consumer a consumers, the goods consumer b consumes and a market price, which is an equiblrium, then markets are effieicnt/pareto optimal.
If there are no public goods, externalities or market power, then the equilibrium allocation is Pareto optimal.
-Limitations:
-True for many goods apart from public goods, exeternalities, market power etc, these are known as market failures.
-Define a core allocation
A core allocation is an allocation of resources where no group of individuals can reallocate among themselves to make everyone in that group better off without making anyone in the group worse off.
-Every core allocation is Pareto efficient (but not every Pareto efficient allocation is in the core).
Describe Walrasian equilibria
market clear
consumers optimise
-walrus law if one market clears all do
-solve by using clearing funciton
x1a + x1b = w1a + w1b
x2a + x2b = w2a + w2b
Formal defintion of equiblirum and unqiue equiblirum in overlapping generations model + how to write out
-Equiblrium is a price and consumption bundles such that consumers maxmise utility and markets clear, total resources = total consumption, popw and popc
-Unique equilibirum
Write 3 things, we know in equiblirum pt+1 = 1/MRS*Pt, therefore see the relationship prices have in the enxt period and write out examples, eg) pt+1= 2pt, times 2 every period thus 2^t = pt. Write pt in equiblirum by looking at this relationship, consumers consume their endowments, w = c for every t, and consumption in period 0 is w0.
-Price t = 1/MRS^t
-co = wo, cy = wy, with bar sbove letters
-equiblrium consumption in old and new period is equal to endowmnets.
Why is the first welfare theorem not true for the overlapping generations model?/not valid
-invalid because dynamic inefficiency can arise, where future generations may be worse off due to suboptimal resource allocation or saving/investment decisions, violating the assumption of optimality.
Feasible and pareto efficient allocations within the overlapping gernerations model and when the equilibrium allocation is Pareto optimal/dynamic efficient within this model
-A allcoation is feasible in the oGm if market clears and consumption at any value of t, for either old or new gen, is positive > 0.
-A pareto optimal allocation is a feasible allocation such that no other allocation exists which provides a higher utility.
-if real interest rate is lower than growth rate,. . .
then the equilibrium allocation is not Pareto optimal, dynamic ineffieincy if r < n
How can money be used in overlapping gen model
money can be used as a store of value, enabling individuals to save and transfer wealth across generations, which can help smooth consumption over time. By facilitating savings and investment, money can improve wealth accumulation, reducing dynamic inefficiency and enhancing welfare.
eg) giving all old consumers at date t = 0 one unit of money
define real interest rate formula in the overlapping gernerations model
rt = pt - pt+1 / pt+1
Consumer problem for a old consumers at date t = 0:
-Maxmise utility function st to constraint.
-We find the solution is consumers consume co = wo their endowmnet.
define situations when the MA AU AND IIT axioms are violated
-MA (Minimal Acyclicity) Axiom Violation:
When preferences become cyclical or contradictory (e.g., A > B, B > C, but C > A).
-AU (Autarky) Axiom Violation:
When the introduction of other options changes the ranking of the initial preferred option (e.g., preferring A in isolation, but B after C is introduced).
-IIT (Independence of Irrelevant Alternatives) Axiom Violation:
When adding an irrelevant option changes the choice between two other options (e.g., choosing A over B, but introducing C makes B preferred).
-MA violated when, assuming common beleifs, trade doesnt make utility of both go up. MA also violated when switching beleifs leads to a worse outcome for both.
-THE MA AND IIT axioms are violaetd when a prespecified beelif does not lead to an increase in U for both.
Define the independence of irrelevant trade axiom IIT, when ok to violate it?
-The IIA axiom states that adding an irrelevant option shouldn’t change a person’s choice between two options. It’s okay to violate it when choices are influenced by context or other factors
-eg) changing choice based on new option presentedcan be violated when people’s preferences change based on how options are presented.
-if a trade between abcd is ok than a trade between a and b is ok in an econ with a and b.
Define and give three examples of spurious unanimity
Consumers agree on action yet disagree on beleif.
-Eg) political voting system, financial trading, anyhting inbolving carrying out the same action yet having different beleifs regarding outcome.
define the unanimity axiom UA, and When would it be OK to violate it?
The Unanimity Axiom (UA) states that if all individuals prefer one option over another, the group should also prefer that option as a group.
-in economies with identical beleifs, all trades are ok, cannot argue agaoinst trades.eg) trade between a and d ok in econ with just a and d.
It’s generally okay to violate the Unanimity Axiom when long-term goals, collective welfare require a decision that doesn’t align with the unanimous preference. eg)
When external factors, such as laws or regulations, force a decision that goes against individual preferences.
-real world example) ok to violate when priorisiting long term growth/improvement of labour standards in an office by choosing a certain layout over the preffered layout.
Define the rule that satisfies all 3 axioms IIT MA AND UA
-No regulation/intervention with trades, having no regulation does not violate any axiom thus satifies all 3.
-The theory behind no regulation is that if consumers agree to trade, regulator should not block them.
define the ma axiom, merge proofness of autarky and when ok to violate
Merge-proofness of autarky states that if an option is best when no other options are available, adding other options should not make this option any worse.
okay to violate in real-world situations where the introduction of new options changes the context.
Example: In a real-world election, a voter might prefer Candidate A over Candidate B when choosing between just those two. However, when a third Candidate C is introduced, the voter may now prefer Candidate B over Candidate A, violating MA axiom
-eg) model: if a and b trade in econ with a and b and c and d trade in an econ of c and d, then these trades are ok in an econ with all abc and d.
