Term 2 Econ

Question 1

Allocation

Answer 1

Indicates how goods in the economy Are distributed among agents

Question 2

Walrasian Equilibrium

Answer 2

In an exchange economy is a feasible allocation of X and a set of prices P:

1. Each agent maximises their utility given their budget constraint
2. The markets clear: total demand for each good K is equal to its supply

Question 3

Pareto Efficient

Answer 3

An allocation X is pareto-efficient if there exists:
No other feasible allocation Y such that
U^i(y) ≥ U^i(x) for each agent i and
U^j(y) > U^j(x) for some agent j
where U^i(x) is agent i’s utility function from consuming their allocation given my X)

Question 4

Contract Curve - only for continuous utility - a locus of PE points

Answer 4

In an exchange economy the core or contract curve is the set of allocations that are Pareto-efficient
-> Where each agency’s utility is weakly better off as they would be consuming their original endowment

expected that agents will trade to an allocation with the contract curve

Question 5

Pareto-efficient Allocation

Answer 5

Cannot make one agent better off without making another worse off

Question 6

The 1st Welfare Theorem

Answer 6

If agents preferences:

1. depend only on their own consumption (no externalities)
2. are always locally non satiated

Then the Walrasian Equilibrium is Pareto efficient

Question 7

2nd Welfare Theorem

Answer 7

If X is a Pareto-efficient allocation:

1. Agents have convex preferences with strictly positive marginal utility for each good
2. A Walrasian equilibrium allocation exists starting with X as agents’ endowment

Then (X,P) is a Walrasian Equilibrium for some price P

Any Pareto efficient allocation forms part of a Walrasian Equilibrium starting with a certain set of endowments

Question 8

Endowment

Answer 8

The bundle of goods that the agent has initially before trading occurs

Question 9

Trigger strategy

Answer 9

To induce cooperation, players adopt a trigger-strategy

• where the players agree to cooperate and play NE
• if one player deviates for a short time → other player adopts the “punishment action” and plays PE coop

Question 10

Kaldor’s Stylised Facts of Growth

Answer 10

1. Output per head growing secularly
2. Capital per head growing secularly
3. Capital / Output ratio roughly constant
4. Real return to capital roughly constant
5. Real wages growing secularly
6. Absence of global convergence

ROC CORR AGC

Question 11

Cournot-Nash Duopoly

Answer 11

• One shot simultaneous move game
• Firms choose and announce their output levels q1, q2 simultaneously without consultation
• Both firms have full info
• Bit firms want to MAX Profit

Question 12

Cournot Nash Duopoly - CNE

Answer 12

Intersection of BR curves

Overall quantity supplied - greater than monopolist’s output q^m

At CNE: output is lower than at the efficient competitive outcome

Question 13

Stackelberg Leader Follower Duopoly

Answer 13

• Market leader firm 1 sets it’s output t first and announces it before firm 2
• firm 1 knows firm 2 will adopt BR2

Question 14

Bertrand Duopoly - competition in price space

Answer 14

• one shot simultaneous move game in price space
• the 2 firms announce the price they which to sell at simultaneously without consultation
• Action sets are (p1,p2) - price set by firms

ASSUME: identical firms with constant MC = k
Consumers are rational = buy the cheapest so if p1=p2 each firm gets 50%

Question 15

Solow growth model assumptions

Answer 15

CBC

1. Closed economy I = S + (T -G)
2. Balanced Budget I = S
3. Constant Savings Rate I = SY

Question 16

Golden rule of saving

Answer 16

The level of saving SG that maximises the steady state (long run) consumption per head C/N

C/N = (1-S) Y/N -δK/N

C/N is maximised when:
d/ds(Y/N) = δd/ds(K/AN)