Microeconomics Flashcards
Competitive equilibrium definition and assumptions
Def: is (x,p) s.t. MRSa= MRSb = p/p and wa + wb = xa + xb
- must specify price and allocation
Assumptions: continuous, convex, monotonic consumer preferences. w>0
Walrus’ law
What does it imply
p1z1 + p2z2 = 0
Excess demand: z = xa - wa + xb - wb
In general equilibrium model with 2 goodS: if one market clears so does the other. Need income = profit.
Assumptions of production economy (competitive equilibrium)
no increasing returns
free disposal
irreversibility of production
wages & prices are competitive
Trade model
Hecksher-Ohlin:
- Assumes LOOP
- direction of trade is irrelevant for improving customer’s utility if the customers in the 2 countries are identical. If different one country could be worse off
- Autarky -> gains from trade (substitution shift) -> gains from specialisation (income shift)
Stopler-Samulseon
If CRS and both goods continue to be produced, a relative increase in the price of a good will increase the real return to the factor used intensively in that industry and reduce the real return to the other factor
- some producers can suffer from trade liberalisation
Equity in efficiency
Amartya Sen: ‘an economy can be Pareto-optimal and still be perfectly disgusting’
- optimal if can’t make starters better off w/o cutting into the rich
Second theorem of welfare economics
if (x,y,p) is competitive equilibrium then (x,y) is pareto efficient (x,p) and (l,w) then (x,l) = (2,1) PE
If fixes prices and have any w on BC then agents will trade to x*
Assuming that preferences and production sets are
convex, any Pareto efficient allocation can be achieved as a GCE with appropriate initial endowments (i.e. can be achieved via lump-sum transfers)
Social welfare functions
Utilitarian: sum utilities
- unit comparable (differences) and cardinality
- to rank allocations that aren’t Pareto comparable need to compare loss of one with gain of another
Rawlsian: maxmin
- level comparable (total)
- if agents have same preferences then can be ranked (don’t need cardinality)
Define strategyproofness
no agent can report different preferences and be better off under the outcome of the social welfare function
Arrow’s impossibility theorem
No social rule that satisfies these 4 axions:
U - unrestricted domain
- single-peaked preferences (one-dimensional alternatives)
P - pareto optimal
I - irrelevance or independent alternatives
- Borda count
D - non-dictorship
DWL equation
DWL = 1/2 * t^2/p * px * esed/es + ed
Optimal commodity tax and assumptions
min sum DWL s.t. sumtx > G:
- t/pi / t/pj = ej/ei
- Frank Ramsay: tax in proportion to G but goods with higher elasticity tax more
- optimal is regressive tax
Assumptions: no lump sum, linear demand, cross-price elasticities = 0, constant MC
Cost benefit analysis
NPV = sum B-C/(1+r)^t
Coase Theorem
Irrespective of the allocation of property rights, frictionless bargaining produces the efficient of outcome in presence of externalities
- different distributional consequences
- frictions: legal, time
Tax vs quantity
Weitzman 1974:
- minimise DWL from error
MC> MB set quantity
MC < MB set tax
- Price: double dividend from revenue, easier to change p than q
- Tax: destination-based tax - displace consumption/investment. Tax product - mobility
- how decide on the marginal external effect: IEA letter - model with lower emissions - too fossil fuel friendly
- risk of carbon leakage: EU free allowances to safeguard industries at risk of carbon leakage
Quantity
- regulation so not unanimous vote in council
- price fluctuate - less incentive for RandD
1) Efficiency (if uncertainty) 2) Distributive 3) Political-Economical (enforcement - costly, EU)
Prisoner’s dilemma definition
Individual utility maximisation leads to a Pareto inferior outcome
- e.g. 19709 tobacco agreement - inc profits by $91m
Nash equilibrium defintion
a strategy profile such that each player’s strategy is a best response to the strategies of other players
Battle of the sexes
Coorindation game, need to coordinate to get highest payoff
Subgame perfect equilibrium
A nash equilibrium which induces a Nash equilibrium in each subgame
- assume know each other’s payoffs
- show using tree diagram (extensive form)
- SPE: (L: l after L, r after R) so SPE is (L,l)
- eliminates NE that rely on non credible threats/promises
- collusion is not SPE in a finite game
- small firms don’t have capacity to flood the market - not credible - damage them more than deviator.
- large firm: predatory price - suffer larger losses but can do in selective markets
Trigger strategy
Play X as long as opponent doesn’t play y, in which case play Z. Grim: play Z forever.
Folk Theorem
Any feasible payoff pair which gives each player at least her minimax payoff can be supported in an equilibrium tof an infinitely repeated game if players are sufficiently patient.
Minimax: lowest payoff when playing best response
Finite repeated
The unique SPE is to play the stage game NE in every period.
- final subgame is like one-shot
- T-1: no credible threat of punishment to induce a player to play anything other than the Nash equilibrium
Why don’t always ban mergers
- economies of scale (natural monopoly) - average cost is declining
- high profits fund RandD
- incentive to innovate
Factors affecting likelihood of collusion
- n (mergers) - 77% cartels <7 participants
- frequency of sales / transparency / algorithms / Albeak et al 97: Danish 93
- TIMELINESS OF PUNISHMENT
- Meeting competition clauses - JL
- Multimarket contact: Bernheim & Whinston (1990)
- Evans & Kessides (1994)
- Common ownership: Azar et al 2018 - Jp, Citi 3-7%
- exchange info, incentive to cheat
- leniency programs
- cost asymmetries (focal point: Scherer 1980)
- Size effect: small firms more impatient & capacity constrained so can’t flood market
- Demand stability - Green & Porter