Pareto Optimality

Question 1

A Pareto Optimal allocation = where there is no way to ______ or ______ so that someone is made better off without _______

Answer 1

rearrange production; reallocate goods; making anyone else worse off

Question 2

To find pareto optimal allocation, must solve ______

Answer 2

social planner’s problem

Question 3

Social planner decides ______ for HH and firm.

Answer 3

c, N and Y

Question 4

Assumption about social planner

Answer 4

benevolent - searches for best possible allocation that is pareto optimal
no prices, closed economy and static

Question 5

Social Planner's Problem
max u(c, l) s.t. \_\_\_\_\_\_\_\_\_\_\_ AKA \_\_\_\_\_\_\_

Answer 5

c + G = zF(K bar, h - l); resource constraint

Question 6

Methods to solve social planner’s problem are

1) _____
2) _____

Answer 6

impose constraint

lagrangian

Question 7

In impose constraint method, the choice variable(s) is _____ and objective function is ______

Answer 7

l; u(zF(K bar, h - l) - G, l)

Question 8

z = f(x, y)
dz/dt = \_\_\_\_\_\_\_

Answer 8

(dz/dx)(dx/dt) + (dz/dy)(dy/dt)

Question 9

max u[zF(K bar, h - l), l]

FOC is

Answer 9

-u_czF_N + u_l = 0

du/dl = (du/dc)(dc/dN)(dN/dl) + (du/dl)(dl/dl) = 0

Question 10

max u[zF(K bar, h - l), l]

MRS =

Answer 10

zF_N = MPN

Question 11

Pareto Optimal solution is MRS = MPN. This is same as _______ in Lecture 1. This is an example of _______ theorem.

Answer 11

competitive equilibrium; first welfare

Question 12

Graphically, social planner’s solution is ________ between ___________

Answer 12

tangency; IC and PPF

Question 13

First Fundamental Welfare Theorem is _______

Answer 13

under certain conditions, CE is PO