Chapter 6: Pure Exchange

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Chapter 6: Pure Exchange"

Transcription

1 Chapter 6: Pure Exchange Pure Exchange Pareto-Efficient Allocation Competitive Price System Equitable Endowments Fair Social Welfare Allocation Outline and Conceptual Inquiries There are Gains from Trade Consider a Two-Commodity and Two-Household Economy How do you feed the multitudes? The World Viewed in an Edgeworth Box Can you put a whole economy in one box? Application: Why the Edgeworth Box is Not a Pareto Box Understanding a Pareto-Efficient Allocation Contract Curve (Pareto-Efficient Allocation) Why are Price-Signals Efficient? Why should you love free markets? Application: POW Camp Illustration of the First Fundamental Theorem of Welfare Economics How much are you willing to exchange apples for oranges? Walras Law and the Beauty of Price Signals Is there excess demand in an economy? Improving Social Welfare Why have equal opportunity legislation? Application: Equitable Allocations and Equal Access

2 Summary 1. In partial-equilibrium analysis, only one segment of an economy is analyzed, without consideration of possible interactions with other segments. This is in contrast to generalequilibrium analysis, which investigates interactions among agents across market segments. 2. An efficient allocation of commodities is possible by households trading commodities, and an allocation of commodities is said to be Pareto-efficient if no one household can be made better off without making some other household worse off. The necessary condition for such an efficient allocation is that the marginal rates of substitution among all households are equal. 3. The set of Pareto-efficient allocations is represented by the contract curve in an Edgeworth box diagram. At every point on the contract curve, all gains from trade are exhausted. 4. A problem with the Pareto-efficient criterion is it does not result in a complete social ranking of alternative allocations. There are many policies that result in a gain to one agent but a loss to another. For such policies, the Pareto criterion will not aid in determining the social desirability of the policy. 5. As the number of households increases, the process of bartering for commodities becomes increasingly difficult. Since transaction costs escalate with increases in the number of households, the competitive price system, where all commodities are valued in the market by their money equivalence, offers a Pareto-efficient mechanism for allocating commodities. 6. The Pareto efficiency of the competitive price system is established by the First Fundamental Theorem of Welfare Economics. Every perfectly competitive allocation is Pareto-optimal. 7. The Second Fundamental Theorem of Welfare Economics states that every Pareto-efficient allocation has an associated perfectly competitive set of prices. 8. The Walrasian equilibrium in a general equilibrium model is established through a tâtonnement (trial-and-error) process. At equilibrium in every market, all markets clear, so aggregate demand is equal to aggregate supply. 9. A Pareto-efficient allocation of commodities does result from a Walrasian equilibrium; however, it may not correspond to the optimal social-welfare allocation. A Walrasian equilibrium is based on a given initial allocation of endowments, so for a social-welfare optimal this distribution of endowments must be optimal. 10. An equitable distribution of initial endowments is where no household prefers any other household s initial endowment. Given an equitable distribution of endowments, the Walrasian equilibrium will result in a fair allocation of commodities. In such cases, a state of

3 optimal social welfare may be obtained. 11. Providing equal opportunities for enriching a household s endowments is an equitable distribution of endowments. As indicated by US history, a mating of equal opportunity with free markets can lead toward an optimal social-welfare allocation of commodities. Key Concepts contract curve core solution Edgeworth box equitable fair allocation feasible allocation First Fundamental Theorem of Welfare Economics general-equilibrium analysis Pareto-efficient allocation Pareto improvement partial-equilibrium analysis perfectly competitive price system price system pure-exchange economy Second Fundamental Theorem of Welfare Economics tâtonnement Walras Law Key Equations MRS 1 = MRS 2 = = MRS n A necessary condition for a Pareto-efficient allocation of commodities. An allocation is feasible if aggregate consumption of each commodity is equal to aggregate supply. MRS 1 = MRS 2 = = MRS n = p 1 /p 2 Walrasian equilibrium, where every household s rate of tradeoff equals society s rate of tradeoff. p 1 z 1 + p 2 z 2 = 0 Walras Law, where the value of the aggregate excess demand is zero.

4 TEST YOURSELF Multiple Choice 1. In a pure-exchange economy a. Households produce and exchange commodities b. Households exchange their endowments, but no production takes place c. Households can trade their initial endowments of commodities, but no production takes place. d. Prices are used for trading. 2. Suppose there are only three households in an economy. The necessary condition for an efficient allocation of commodities is a. MRS 1 = MRS 2 = MRS 3 = λ b. MRS 1 + MRS 2 + MRS 3 = λ c. MRS 1 = MRS 2 = MRS 3 d. MRS 1 = MRS 2 = MRS 3 = MRS. 3. Suppose Robinson, R, and Friday, F, are the only two households in an economy. At the current allocation of x 1 and x 2, MRS R (x 2 for x 1 ) = ¾ while MRS F (x 2 for x 1 ) = 1. Which of the following is correct? a. A Pareto improvement could be made if Robinson traded some x 1 for x 2 b. A Pareto improvement could be made if Friday traded some x 1 for x 2 c. A Pareto improvement could be made if Robinson received some x 1 and x 2 from Friday d. A Pareto improvement could be made if Friday received some x 1 and x 2 from Robinson. 4. An Edgeworth box demonstrates a. The supply and demand for two commodities b. The feasible allocations of two commodities for two households c. Equitable allocations of commodities d. All of the above. 5. What is the criterion for judging if an allocation is feasible? a. The total quantity of each commodity consumed must be equal to the total available from endowments b. MRS for each household must be equal c. The price ratio must be equal to the ratio of the initial endowments d. Each household must not be envious of other households endowments. 6. A Pareto-efficient allocation occurs a. When all gains from trade have been exhausted

5 b. When there is no way to make someone better off without making someone else worse off c. on the contract curve d. All of the above. 7. Suppose an economy consists of two households consuming two commodities (x 1 and x 2 ). The contract curve for these households illustrates the a. Allocations for which a Pareto improvement is possible b. Initial endowments of commodities and contracts for trading c. Allocations that are Pareto-efficient d. Prices for making a contract. Refer to the following graph for Questions 8 and 9: R F e 2 + e 2 Bread x 2 0 A U 2 R B R e 2 F U 2 0 R e Fish x R 1 1 C U 1 F U 1 R R F e 1 + e 1 8. Which allocations are Pareto-efficient? a. A b. C c. A and B d. A, B, and C. 9. The Pareto improvement is a. Between and b. below c. Between and d. between and

6 10. In a perfectly competitive price system, a. A household has no control over the prices it faces b. Barter is used instead of exchanging money c. Endowments are efficient d. A Pareto-efficient outcome is unattainable. 11. The First Fundamental Theorem of Welfare Economics requires that a. Households consume their initial endowments of commodities b. Every Pareto-efficient allocation has an associated perfectly competitive set of prices c. A Pareto-efficient allocation maximizes social welfare d. Every perfectly competitive allocation is Pareto-efficient. 12. A Walsrasian equilibrium occurs when n households MRS(x 2 for x 1 ) and prices yield a. MRS 1 = MRS 2 = = MRS n = p 2 /p 1 b. MRS 1 + MRS MRS n = p 2 /p 1 c. MRS 1 + MRS MRS n = p 1 /p 2 d. MRS 1 = MRS 2 = = MRS n = p 1 /p An offer curve is analogous to the a. Price consumption curve b. Engel curve c. Income consumption curve d. Contract curve. 14. At the Pareto-efficient allocation for two commodities two households (1 and 2), a. MRS 1 = MRS 2 b. The households offer curves intersect c. The households indifference curves are tangent d. All of the above. 15. Suppose the demand functions for two households (S and J) are and The aggregate excess demand function for x 1 is then a. b. c. d. 16. Walras Law implies that a. Excess supply can occur but excess demand cannot b. Excess demand can occur but excess supply cannot c. The value of aggregate excess demand will equal zero d. Excess demand for any one commodity must be equal to zero.

7 Short Answer 1. Explain the difference between a partial equilibrium and a general equilibrium model. Provide an example of each. 2. Suppose an economy consists of two households (Marjean and Kelly) that purchase two commodities (x 1 and x 2 ). Marjean s MRS M (x 2 for x 1 ) is 3 while Kelly s MRS K (x 2 for x 1 ) is 5. Is this allocation of x 1 and x 2 efficient? Explain. If not, how could x 1 and x 2 be reallocated to improve efficiency? 3. Graph an Edgeworth box diagram explaining what is meant by a Pareto-efficient allocation. Also, describe the core solution. What factors will determine the exact allocation of commodities chosen? 4. Comment on the following: Every point on the contract curve results in economic efficiency, but social welfare is not maximized at every point. 5. Describe the First and Second Fundamental Theorems of Welfare Economics. 6. Demonstrate how a household s offer curve can be derived. 7. Explain Walras Law. 8. Alberta believes that society is better off when endowments of commodities are equitable. Explain to her why this may be undesirable.

8 Problems 1. Suppose Tom and Jerry have the utility functions and with and Find the contract curve (Pareto-efficient set). 2. Suppose Homer and Marge have the utility functions and with initial endowments of and Find the Walrasian equilibrium allocations of x 1 and x Refer to Problem 2. Find Homer s and Marge s offer curves. 4. Suppose Sara and Andrea have the utility functions and with initial endowments and Find the Walrasian equilibrium allocations for x 1 and x An economy consists of two households (Carly, C, and Katherine, K) and two commodities (x 1 for bottled water and x 2 for pizza). Carly s initial endowments are 4 waters and 1 pizza, while Katherine s initial endowments are 3 waters and 3 pizzas. Assume that Carly and Katherine have the same identical utility function U = 3x 1 x 2. a. Graph the associated Edgeworth box. b. Determine each household s marginal rate of substitution (pizza for water). c. On the graph, illustrate indifference curves for Carly and Katherine at their initial endowments. d. Determine the Pareto-efficient condition. On the graph, indicate the locus of Paretoefficient allocations. e. Determine Carly s and Katherine s consumption bundles in a competitive equilibrium. What are the relative prices of bottled water and pizza at this equilibrium?

2. Efficiency and Perfect Competition

2. Efficiency and Perfect Competition General Equilibrium Theory 1 Overview 1. General Equilibrium Analysis I Partial Equilibrium Bias 2. Efficiency and Perfect Competition 3. General Equilibrium Analysis II The Efficiency if Competition The

More information

Efficiency, Optimality, and Competitive Market Allocations

Efficiency, Optimality, and Competitive Market Allocations Efficiency, Optimality, and Competitive Market Allocations areto Efficient Allocations An allocation of resources is areto efficient if it is not possible to reallocate resources in economy to make one

More information

The Walrasian Model and Walrasian Equilibrium

The Walrasian Model and Walrasian Equilibrium The Walrasian Model and Walrasian Equilibrium 1.1 There are only two goods in the economy and there is no way to produce either good. There are n individuals, indexed by i = 1,..., n. Individual i owns

More information

First Welfare Theorem

First Welfare Theorem First Welfare Theorem Econ 2100 Fall 2015 Lecture 17, November 2 Outline 1 First Welfare Theorem 2 Preliminaries to Second Welfare Theorem Last Class Definitions A feasible allocation (x, y) is Pareto

More information

ECON 301: General Equilibrium I (Exchange) 1. Intermediate Microeconomics II, ECON 301. General Equilibrium I: Exchange

ECON 301: General Equilibrium I (Exchange) 1. Intermediate Microeconomics II, ECON 301. General Equilibrium I: Exchange ECON 301: General Equilibrium I (Exchange) 1 Intermediate Microeconomics II, ECON 301 General Equilibrium I: Exchange The equilibrium concepts you have used till now in your Introduction to Economics,

More information

The Market-Clearing Model

The Market-Clearing Model Chapter 5 The Market-Clearing Model Most of the models that we use in this book build on two common assumptions. First, we assume that there exist markets for all goods present in the economy, and that

More information

MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001

MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001 MICROECONOMICS AND POLICY ANALYSIS - U8213 Professor Rajeev H. Dehejia Class Notes - Spring 2001 General Equilibrium and welfare with production Wednesday, January 24 th and Monday, January 29 th Reading:

More information

1. Briefly explain what an indifference curve is and how it can be graphically derived.

1. Briefly explain what an indifference curve is and how it can be graphically derived. Chapter 2: Consumer Choice Short Answer Questions 1. Briefly explain what an indifference curve is and how it can be graphically derived. Answer: An indifference curve shows the set of consumption bundles

More information

Lecture Notes 5: General Equilibrium. mrkts

Lecture Notes 5: General Equilibrium. mrkts Lecture Notes 5: General Equilibrium We are now ready to analyze the equilibrium in all markets, that is why this type of analysis is called general equilibrium analysis. Recall our graphical overview

More information

Consumer Theory. The consumer s problem

Consumer Theory. The consumer s problem Consumer Theory The consumer s problem 1 The Marginal Rate of Substitution (MRS) We define the MRS(x,y) as the absolute value of the slope of the line tangent to the indifference curve at point point (x,y).

More information

The Efficiency of Markets. What is the best quantity to be produced from society s standpoint, in the sense of maximizing the net benefit to society?

The Efficiency of Markets. What is the best quantity to be produced from society s standpoint, in the sense of maximizing the net benefit to society? The Efficiency of Markets What is the best quantity to be produced from society s standpoint, in the sense of maximizing the net benefit to society? We need to look at the benefits to consumers and producers.

More information

When the price of a good rises (falls) and all other variables affecting the

When the price of a good rises (falls) and all other variables affecting the ONLINE APPENDIX 1 Substitution and Income Effects of a Price Change When the price of a good rises (falls) and all other variables affecting the consumer remain the same, the law of demand tells us that

More information

Theoretical Tools of Public Economics. Part-2

Theoretical Tools of Public Economics. Part-2 Theoretical Tools of Public Economics Part-2 Previous Lecture Definitions and Properties Utility functions Marginal utility: positive (negative) if x is a good ( bad ) Diminishing marginal utility Indifferences

More information

Hurley, Chapter 7 (see also review in chapter 3)

Hurley, Chapter 7 (see also review in chapter 3) Hurley, Chapter 7 (see also review in chapter 3) Chris Auld Economics 318 February 20, 2014 Why is health care different? Is health care different from other commodities? Yes, but not because it s really

More information

Economics 165 Winter 2002 Problem Set #2

Economics 165 Winter 2002 Problem Set #2 Economics 165 Winter 2002 Problem Set #2 Problem 1: Consider the monopolistic competition model. Say we are looking at sailboat producers. Each producer has fixed costs of 10 million and marginal costs

More information

Unit 2: Theory of Externalities: Pareto optimality and market failure in the presence of externalities; property rights and the Coase theorem

Unit 2: Theory of Externalities: Pareto optimality and market failure in the presence of externalities; property rights and the Coase theorem Unit 2: Theory of Externalities: Pareto optimality and market failure in the presence of externalities; property rights and the Coase theorem Public Goods and Externalities (from chapter five, Kolstad,

More information

Economics 200B Part 1 UCSD Winter 2015 Prof. R. Starr, Mr. John Rehbeck Final Exam 1

Economics 200B Part 1 UCSD Winter 2015 Prof. R. Starr, Mr. John Rehbeck Final Exam 1 Economics 200B Part 1 UCSD Winter 2015 Prof. R. Starr, Mr. John Rehbeck Final Exam 1 Your Name: SUGGESTED ANSWERS Please answer all questions. Each of the six questions marked with a big number counts

More information

Problem Set #5-Key. Economics 305-Intermediate Microeconomic Theory

Problem Set #5-Key. Economics 305-Intermediate Microeconomic Theory Problem Set #5-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr Cuellar (1) Suppose that you are paying your for your own education and that your college tuition is $200 per

More information

Indifference Curves: An Example (pp. 65-79) 2005 Pearson Education, Inc.

Indifference Curves: An Example (pp. 65-79) 2005 Pearson Education, Inc. Indifference Curves: An Example (pp. 65-79) Market Basket A B D E G H Units of Food 20 10 40 30 10 10 Units of Clothing 30 50 20 40 20 40 Chapter 3 1 Indifference Curves: An Example (pp. 65-79) Graph the

More information

Table of Contents MICRO ECONOMICS

Table of Contents MICRO ECONOMICS economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

More information

Perman et al.: Ch. 4. Welfare economics and the environment

Perman et al.: Ch. 4. Welfare economics and the environment Perman et al.: Ch. 4 Welfare economics and the environment Objectives of lecture Derive the conditions for allocative efficiency of resources Show that a perfect market provides efficient allocation of

More information

Figure 4-1 Price Quantity Quantity Per Pair Demanded Supplied $ 2 18 3 $ 4 14 4 $ 6 10 5 $ 8 6 6 $10 2 8

Figure 4-1 Price Quantity Quantity Per Pair Demanded Supplied $ 2 18 3 $ 4 14 4 $ 6 10 5 $ 8 6 6 $10 2 8 Econ 101 Summer 2005 In-class Assignment 2 & HW3 MULTIPLE CHOICE 1. A government-imposed price ceiling set below the market's equilibrium price for a good will produce an excess supply of the good. a.

More information

Gains from Trade. Christopher P. Chambers and Takashi Hayashi. March 25, 2013. Abstract

Gains from Trade. Christopher P. Chambers and Takashi Hayashi. March 25, 2013. Abstract Gains from Trade Christopher P. Chambers Takashi Hayashi March 25, 2013 Abstract In a market design context, we ask whether there exists a system of transfers regulations whereby gains from trade can always

More information

CHAPTER 3 CONSUMER BEHAVIOR

CHAPTER 3 CONSUMER BEHAVIOR CHAPTER 3 CONSUMER BEHAVIOR EXERCISES 2. Draw the indifference curves for the following individuals preferences for two goods: hamburgers and beer. a. Al likes beer but hates hamburgers. He always prefers

More information

Introduction. Agents have preferences over the two goods which are determined by a utility function. Speci cally, type 1 agents utility is given by

Introduction. Agents have preferences over the two goods which are determined by a utility function. Speci cally, type 1 agents utility is given by Introduction General equilibrium analysis looks at how multiple markets come into equilibrium simultaneously. With many markets, equilibrium analysis must take explicit account of the fact that changes

More information

Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets

Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets Unraveling versus Unraveling: A Memo on Competitive Equilibriums and Trade in Insurance Markets Nathaniel Hendren January, 2014 Abstract Both Akerlof (1970) and Rothschild and Stiglitz (1976) show that

More information

General Equilibrium Theory: Examples

General Equilibrium Theory: Examples General Equilibrium Theory: Examples 3 examples of GE: pure exchange (Edgeworth box) 1 producer - 1 consumer several producers and an example illustrating the limits of the partial equilibrium approach

More information

U = x 1 2. 1 x 1 4. 2 x 1 4. What are the equilibrium relative prices of the three goods? traders has members who are best off?

U = x 1 2. 1 x 1 4. 2 x 1 4. What are the equilibrium relative prices of the three goods? traders has members who are best off? Chapter 7 General Equilibrium Exercise 7. Suppose there are 00 traders in a market all of whom behave as price takers. Suppose there are three goods and the traders own initially the following quantities:

More information

ECON 100B, SP09 Exam #1. Answer all of the following questions, using graphs where necessary. Please be concise and thorough.

ECON 100B, SP09 Exam #1. Answer all of the following questions, using graphs where necessary. Please be concise and thorough. Answer all of the following questions, using graphs where necessary. Please be concise and thorough. 1. Preparation time for the typical family meal has dwindled from two and a half hours in the early

More information

The Model of Perfect Competition

The Model of Perfect Competition The Model of Perfect Competition Key issues The meaning of perfect competition Characteristics of perfect competition and output under competition Competition and economic efficiency Wider benefits of

More information

(First 6 problems from Caves, Frankel and Jones, 1990)

(First 6 problems from Caves, Frankel and Jones, 1990) Professor Robert Staiger Economics 39F Problem Set 1 (First 6 problems from Caves, Frankel and Jones, 1990) 1. With reference to the home country s trade triangle illustrated in Figure 2.3, suppose that

More information

Problem Set #3 Answer Key

Problem Set #3 Answer Key Problem Set #3 Answer Key Economics 305: Macroeconomic Theory Spring 2007 1 Chapter 4, Problem #2 a) To specify an indifference curve, we hold utility constant at ū. Next, rearrange in the form: C = ū

More information

Chapter 3 Consumer Behavior

Chapter 3 Consumer Behavior Chapter 3 Consumer Behavior Read Pindyck and Rubinfeld (2013), Chapter 3 Microeconomics, 8 h Edition by R.S. Pindyck and D.L. Rubinfeld Adapted by Chairat Aemkulwat for Econ I: 2900111 1/29/2015 CHAPTER

More information

An example of externalities - the multiplicative case

An example of externalities - the multiplicative case An example of externalities - the multiplicative case Yossi Spiegel Consider an exchange economy with two agents, A and B, who consume two goods, x and y. This economy however, differs from the usual exchange

More information

Noah Williams Economics 312. University of Wisconsin Spring 2013. Midterm Examination Solutions

Noah Williams Economics 312. University of Wisconsin Spring 2013. Midterm Examination Solutions Noah Williams Economics 31 Department of Economics Macroeconomics University of Wisconsin Spring 013 Midterm Examination Solutions Instructions: This is a 75 minute examination worth 100 total points.

More information

CONSUMER PREFERENCES THE THEORY OF THE CONSUMER

CONSUMER PREFERENCES THE THEORY OF THE CONSUMER CONSUMER PREFERENCES The underlying foundation of demand, therefore, is a model of how consumers behave. The individual consumer has a set of preferences and values whose determination are outside the

More information

UNIT 2: CONSUMER EQUILIBRIUM AND DEMAND

UNIT 2: CONSUMER EQUILIBRIUM AND DEMAND KEY CONCEPTS UNIT 2: CONSUMER EQUILIBRIUM AND DEMAND 1. UTILITY A) MARGINAL UTILITY B) LAW OF DIMINISHING MARGINAL UTILITY 2. CONDITIONS OF CONSUMER S EQUILIBRIUM 3. INDIFFERENCE CURVE ANALYSIS 4. THE

More information

Econ 101: Principles of Microeconomics Fall 2012

Econ 101: Principles of Microeconomics Fall 2012 Problem 1: Use the following graph to answer the questions. a. From the graph, which good has the price change? Did the price go down or up? What is the fraction of the new price relative to the original

More information

Name. Final Exam, Economics 210A, December 2011 Here are some remarks to help you with answering the questions.

Name. Final Exam, Economics 210A, December 2011 Here are some remarks to help you with answering the questions. Name Final Exam, Economics 210A, December 2011 Here are some remarks to help you with answering the questions. Question 1. A firm has a production function F (x 1, x 2 ) = ( x 1 + x 2 ) 2. It is a price

More information

Lecture 2 Dynamic Equilibrium Models : Finite Periods

Lecture 2 Dynamic Equilibrium Models : Finite Periods Lecture 2 Dynamic Equilibrium Models : Finite Periods 1. Introduction In macroeconomics, we study the behavior of economy-wide aggregates e.g. GDP, savings, investment, employment and so on - and their

More information

In following this handout, sketch appropriate graphs in the space provided.

In following this handout, sketch appropriate graphs in the space provided. Dr. McGahagan Graphs and microeconomics You will see a remarkable number of graphs on the blackboard and in the text in this course. You will see a fair number on examinations as well, and many exam questions,

More information

The fundamental question in economics is 2. Consumer Preferences

The fundamental question in economics is 2. Consumer Preferences A Theory of Consumer Behavior Preliminaries 1. Introduction The fundamental question in economics is 2. Consumer Preferences Given limited resources, how are goods and service allocated? 1 3. Indifference

More information

(b) Can Charlie afford any bundles that give him a utility of 150? (c) Can Charlie afford any bundles that give him a utility of 300?

(b) Can Charlie afford any bundles that give him a utility of 150? (c) Can Charlie afford any bundles that give him a utility of 300? Micro PS2 - Choice, Demand and Consumer Surplus 1. We begin again with Charlie of the apples and bananas. Recall that Charlie s utility function is U(x A, x B ) = x A x B. Suppose that the price of apples

More information

ECO364 - International Trade

ECO364 - International Trade ECO364 - International Trade Chapter 2 - Ricardo Christian Dippel University of Toronto Summer 2009 Christian Dippel (University of Toronto) ECO364 - International Trade Summer 2009 1 / 73 : The Ricardian

More information

Where are we? To do today: finish the derivation of the demand curve using indifference curves. Go on then to chapter Production and Cost

Where are we? To do today: finish the derivation of the demand curve using indifference curves. Go on then to chapter Production and Cost Where are we? To do today: finish the derivation of the demand curve using indifference curves Go on then to chapter Production and Cost Utility and indifference curves The point is to find where on the

More information

Section B. Some Basic Economic Concepts

Section B. Some Basic Economic Concepts This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License. Your use of this material constitutes acceptance of that license and the conditions of use of materials on this

More information

The table below shows the prices of the only three commodities traded in Shire.

The table below shows the prices of the only three commodities traded in Shire. Economics 101 Fall 2012 Homework #4 Due 11/20/2012 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework (legibly).

More information

All these models were characterized by constant returns to scale technologies and perfectly competitive markets.

All these models were characterized by constant returns to scale technologies and perfectly competitive markets. Economies of scale and international trade In the models discussed so far, differences in prices across countries (the source of gains from trade) were attributed to differences in resources/technology.

More information

Chapter 4 The Theory of Individual Behavior

Chapter 4 The Theory of Individual Behavior Managerial Economics & Business Strategy Chapter 4 The Theory of Individual Behavior McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. Consumer Behavior

More information

Chapter 23: Asymmetric Information

Chapter 23: Asymmetric Information Chapter 23: Asymmetric Information Asymmetric Information Adverse Selection Moral Hazard Lemons Market Second-Best Mechanism Designs Principal Agent Market Failure Signaling Screening Insurance Employer/

More information

Slutsky Equation. M. Utku Ünver Micro Theory. Boston College. M. Utku Ünver Micro Theory (BC) Slutsky Equation 1 / 15

Slutsky Equation. M. Utku Ünver Micro Theory. Boston College. M. Utku Ünver Micro Theory (BC) Slutsky Equation 1 / 15 Slutsky Equation M. Utku Ünver Micro Theory Boston College M. Utku Ünver Micro Theory (BC) Slutsky Equation 1 / 15 Effects of a Price Change: What happens when the price of a commodity decreases? 1 The

More information

Chapter 9: Perfect Competition

Chapter 9: Perfect Competition Chapter 9: Perfect Competition Perfect Competition Law of One Price Short-Run Equilibrium Long-Run Equilibrium Maximize Profit Market Equilibrium Constant- Cost Industry Increasing- Cost Industry Decreasing-

More information

Indifference Curves and the Marginal Rate of Substitution

Indifference Curves and the Marginal Rate of Substitution Introduction Introduction to Microeconomics Indifference Curves and the Marginal Rate of Substitution In microeconomics we study the decisions and allocative outcomes of firms, consumers, households and

More information

Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013

Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Economics 101 Fall 2013 Answers to Homework 5 Due Tuesday, November 19, 2013 Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on

More information

Week 1 Efficiency in Production and in Consumption and the Fundamental Theorems of Welfare Economics

Week 1 Efficiency in Production and in Consumption and the Fundamental Theorems of Welfare Economics 1. Introduction Week 1 Efficiency in Production and in Consumption and the Fundamental Theorems of Welfare Economics Much of economic theory of the textbook variety is a celebration of the free market

More information

Sample Questions for ECN 302 Midterm 1

Sample Questions for ECN 302 Midterm 1 Sample Questions for ECN 302 Midterm 1 The correct answers are highlighted in yellow and the explanations for selected questions are provided in bold italics. Question (1): Which of the following will

More information

Economics 121b: Intermediate Microeconomics Problem Set 2 1/20/10

Economics 121b: Intermediate Microeconomics Problem Set 2 1/20/10 Dirk Bergemann Department of Economics Yale University s by Olga Timoshenko Economics 121b: Intermediate Microeconomics Problem Set 2 1/20/10 This problem set is due on Wednesday, 1/27/10. Preliminary

More information

Economics 2020a / HBS 4010 / HKS API-111 FALL 2010 Solutions to Practice Problems for Lectures 1 to 4

Economics 2020a / HBS 4010 / HKS API-111 FALL 2010 Solutions to Practice Problems for Lectures 1 to 4 Economics 00a / HBS 4010 / HKS API-111 FALL 010 Solutions to Practice Problems for Lectures 1 to 4 1.1. Quantity Discounts and the Budget Constraint (a) The only distinction between the budget line with

More information

Problem Set II: budget set, convexity

Problem Set II: budget set, convexity Problem Set II: budget set, convexity Paolo Crosetto paolo.crosetto@unimi.it Exercises will be solved in class on January 25th, 2010 Recap: Walrasian Budget set, definition Definition (Walrasian budget

More information

REVIEW OF MICROECONOMICS

REVIEW OF MICROECONOMICS ECO 352 Spring 2010 Precepts Weeks 1, 2 Feb. 1, 8 REVIEW OF MICROECONOMICS Concepts to be reviewed Budget constraint: graphical and algebraic representation Preferences, indifference curves. Utility function

More information

DARTMOUTH COLLEGE, DEPARTMENT OF ECONOMICS ECONOMICS 1. Dartmouth College, Department of Economics: Economics 1, Fall 02.

DARTMOUTH COLLEGE, DEPARTMENT OF ECONOMICS ECONOMICS 1. Dartmouth College, Department of Economics: Economics 1, Fall 02. Dartmouth College, Department of Economics: Economics 1, Fall 02 Topic 5: Welfare Economics 1, Fall 2002 Andreas Bentz Based Primarily on Frank Chapters 16-18 Review: Equilibrium Topic 3, Consumer Theory:

More information

PPF's of Germany and France

PPF's of Germany and France Economics 165 Winter 2 Problem Set #1 Problem 1: Let Germany and France have respective labor forces of 8 and 6. Suppose both countries produce wine and cares according to the following unit labor requirements:

More information

Preferences. M. Utku Ünver Micro Theory. Boston College. M. Utku Ünver Micro Theory (BC) Preferences 1 / 20

Preferences. M. Utku Ünver Micro Theory. Boston College. M. Utku Ünver Micro Theory (BC) Preferences 1 / 20 Preferences M. Utku Ünver Micro Theory Boston College M. Utku Ünver Micro Theory (BC) Preferences 1 / 20 Preference Relations Given any two consumption bundles x = (x 1, x 2 ) and y = (y 1, y 2 ), the

More information

Practice Problem Set 2 (ANSWERS)

Practice Problem Set 2 (ANSWERS) Economics 370 Professor H.J. Schuetze Practice Problem Set 2 (ANSWERS) 1. See the figure below, where the initial budget constraint is given by ACE. After the new legislation is passed, the budget constraint

More information

An example of externalities - the additive case

An example of externalities - the additive case An example of externalities - the additive case Yossi Spiegel Consider an exchange economy with two agents, A and B, who consume two goods, x and y. The preferences of the two agents are represented by

More information

1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is

1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is 1 st Exam 1. Marginal utility measures: A) the total utility of all your consumption B) the total utility divided by the price of the good C) the increase in utility from consuming one additional unit

More information

Market failure and Remedies: Externalities

Market failure and Remedies: Externalities Market failure and Remedies: Externalities Externalities ( 界 外 效 應 ) are material effects of the activities of one or more economic agents on other economic agents, which are not intended in the original

More information

CARLETON ECONOMIC PAPERS

CARLETON ECONOMIC PAPERS CEP 14-14 Employment Gains from Minimum-Wage Hikes under Perfect Competition: A Simple General-Equilibrium Analysis Richard A. Brecher and Till Gross Carleton University November 2014 CARLETON ECONOMIC

More information

Efficiency and Equity

Efficiency and Equity Efficiency and Equity Lectures 1 and 2 Tresch (2008): Chapters 1, 4 Stiglitz (2000): Chapter 5 Connolly and Munro (1999): Chapter 3 Outline Equity, efficiency and their trade-off Social welfare function

More information

Midterm I. 1 Multiple-choice Questions (30 points) Economics 110 Spring 2005 Tanya Rosenblat. Name: Section:

Midterm I. 1 Multiple-choice Questions (30 points) Economics 110 Spring 2005 Tanya Rosenblat. Name: Section: Economics 110 Spring 2005 Tanya Rosenblat Name: Section: Before you proceed, write down your name and section number above. Please read all questions carefully. You will get full credit only if you provide

More information

Problem Set 2 - Answers. Gains from Trade and the Ricardian Model

Problem Set 2 - Answers. Gains from Trade and the Ricardian Model Page 1 of 11 Gains from Trade and the Ricardian Model 1. Use community indifference curves as your indicator of national welfare in order to evaluate the following claim: An improvement in the terms of

More information

Unit 7. Firm behaviour and market structure: monopoly

Unit 7. Firm behaviour and market structure: monopoly Unit 7. Firm behaviour and market structure: monopoly Learning objectives: to identify and examine the sources of monopoly power; to understand the relationship between a monopolist s demand curve and

More information

Equilibrium with Complete Markets

Equilibrium with Complete Markets Equilibrium with Complete Markets Jesús Fernández-Villaverde University of Pennsylvania February 12, 2016 Jesús Fernández-Villaverde (PENN) Equilibrium with Complete Markets February 12, 2016 1 / 24 Arrow-Debreu

More information

17. In class Edward discussed one way to reduce health-care costs is to increases the supply of doctors. A) True B) False

17. In class Edward discussed one way to reduce health-care costs is to increases the supply of doctors. A) True B) False Economics 2010 Sec 300 Second Midterm Fall 2009 Version B There are 58 questions on Version B The test bank questions and the questions we created are mixed together. Name: Date: 1. Lot of people exercise

More information

Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti)

Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti) Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti) Kjetil Storesletten September 10, 2013 Kjetil Storesletten () Lecture 3 September 10, 2013 1 / 44 Growth

More information

General Equilibrium Analysis and Economic Efficiency

General Equilibrium Analysis and Economic Efficiency CHAPTER 19 General Equilibrium Analysis and Economic Efficiency How is equilibrium determined in all markets simultaneously and to what extent do markets promote the well-being of the members of a society

More information

Exercises Lecture 8: Trade policies

Exercises Lecture 8: Trade policies Exercises Lecture 8: Trade policies Exercise 1, from KOM 1. Home s demand and supply curves for wheat are: D = 100 0 S = 0 + 0 Derive and graph Home s import demand schedule. What would the price of wheat

More information

Economic Efficiency in Edgeworth Box Market the Case of Two Goods

Economic Efficiency in Edgeworth Box Market the Case of Two Goods European Journal of Sustainable Development (2013), 2, 4, 355-360 ISSN: 2239-5938 Economic Efficiency in Edgeworth Box Market the Case of Two Goods Prof. As. Dudi SULI 1, MSc Eriona DEDA 2, MSc Hergys

More information

Name Eco200: Practice Test 3A Covering Chapters 16, 18-21

Name Eco200: Practice Test 3A Covering Chapters 16, 18-21 Name Eco200: Practice Test 3A Covering Chapters 16, 18-21 1. The following information describes the demand schedule for a unique type of apple. This type of apple can only be produced by two firms because

More information

Monopoly. Key differences between a Monopoly and Perfect Competition Perfect Competition

Monopoly. Key differences between a Monopoly and Perfect Competition Perfect Competition Monopoly Monopoly is a market structure in which one form makes up the entire supply side of the market. That is, it is the polar opposite to erfect Competition we discussed earlier. How do they come about?

More information

Economics 100A. Final Exam

Economics 100A. Final Exam Name form number 1 Economics 100A Final Exam Fill in the bubbles on your scantron with your id number (starting from the left side of the box), your name, and the form type. Students who do this successfully

More information

Homework #5: Answers. b. How can land rents as well as total wages be shown in such a diagram?

Homework #5: Answers. b. How can land rents as well as total wages be shown in such a diagram? Homework #5: Answers Text questions, hapter 6, problems 1-4. Note that in all of these questions, the convention in the text, whereby production of food uses land and labor, and clothing uses capital and

More information

Economics 103h Fall l 2012: Review Questions for Midterm 2

Economics 103h Fall l 2012: Review Questions for Midterm 2 Economics 103h Fall l 2012: Review Questions for Midterm 2 Essay/Graphing questions 1, Explain the shape of the budget line. 2. What shifts the budget line and why? Give an example in words and demonstrate

More information

Choices. Preferences. Indifference Curves. Preference Relations. ECON 370: Microeconomic Theory Summer 2004 Rice University Stanley Gilbert

Choices. Preferences. Indifference Curves. Preference Relations. ECON 370: Microeconomic Theory Summer 2004 Rice University Stanley Gilbert Choices Preferences ECON 370: Microeconomic Theor Summer 2004 Rice Universit Stanle Gilbert The theor of consumer preferences is based fundamentall on choices The steak dinner or the salad bar Major in

More information

c. In the stock market, there is good information and thousands of buyers and sellers. We expect, in general, efficient outcomes.

c. In the stock market, there is good information and thousands of buyers and sellers. We expect, in general, efficient outcomes. Chapter 3 Tools of Normative Analysis 1. a. In this particular insurance market, one would not expect asymmetric information to be much of a problem the probability of a flood is common knowledge. Moral

More information

Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization

Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization 2.1. Introduction Suppose that an economic relationship can be described by a real-valued

More information

Economics 301 Problem Set 4 5 October 2007

Economics 301 Problem Set 4 5 October 2007 Economics 301 Name Problem Set 4 5 October 2007 Budget Lines and Indifference Curves and the Consumer Optimum 1. Parvez, a pharmacology student, has allocated $120 per month to spend on paperback novels

More information

Choice under Uncertainty

Choice under Uncertainty Choice under Uncertainty Part 1: Expected Utility Function, Attitudes towards Risk, Demand for Insurance Slide 1 Choice under Uncertainty We ll analyze the underlying assumptions of expected utility theory

More information

Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2

Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2 Factor Markets Problem 1 (APT 93, P2) Two goods, coffee and cream, are complements. Due to a natural disaster in Brazil that drastically reduces the supply of coffee in the world market the price of coffee

More information

Bailouts and Financial Innovation: Market Completion Versus Rent Extraction

Bailouts and Financial Innovation: Market Completion Versus Rent Extraction Bailouts and Financial Innovation: Market Completion Versus Rent Extraction Anton Korinek University of Maryland Presentation at the Cowles GE Conference New Haven, CT April 2012 Anton Korinek (UMD) Bailouts

More information

Chapter 4 Online Appendix: The Mathematics of Utility Functions

Chapter 4 Online Appendix: The Mathematics of Utility Functions Chapter 4 Online Appendix: The Mathematics of Utility Functions We saw in the text that utility functions and indifference curves are different ways to represent a consumer s preferences. Calculus can

More information

Scarcity and Production Possibilities

Scarcity and Production Possibilities Scarcity and Production Possibilities Economics 120: Global Macroeconomics 1 1.1 Goals and Learning Objectives Goals and Learning Objectives Goals: Understand definition and goal of macroeconomics. Understand

More information

Chapter 21: Consumer Behavior and Utility Maximization

Chapter 21: Consumer Behavior and Utility Maximization Chapter : Consumer Behavior and Utility Maximization ANSWERS TO END-OF-CHAPTER QUESTIONS - Explain the law of demand through the income and substitution effects, using a price increase as a point of departure

More information

Pre-Test Chapter 8 ed17

Pre-Test Chapter 8 ed17 Pre-Test Chapter 8 ed17 Multiple Choice Questions 1. The APC can be defined as the fraction of a: A. change in income that is not spent. B. change in income that is spent. C. specific level of total income

More information

Intermediate Microeconomics (22014)

Intermediate Microeconomics (22014) Intermediate Microeconomics (22014) I. Consumer Instructor: Marc Teignier-Baqué First Semester, 2011 Outline Part I. Consumer 1. umer 1.1 Budget Constraints 1.2 Preferences 1.3 Utility Function 1.4 1.5

More information

UTILITY AND DEMAND. Chapter. Household Consumption Choices

UTILITY AND DEMAND. Chapter. Household Consumption Choices Chapter 7 UTILITY AND DEMAND Household Consumption Choices Topic: Consumption Possibilities 1) The level of utility a consumer can achieve is limited by A) prices only. B) income only. C) the consumer

More information

ECO 352 Spring 2010 No. 7 Feb. 23 SECTOR-SPECIFIC CAPITAL (RICARDO-VINER) MODEL

ECO 352 Spring 2010 No. 7 Feb. 23 SECTOR-SPECIFIC CAPITAL (RICARDO-VINER) MODEL ECO 352 Spring 2010 No. 7 Feb. 23 SECTOR-SPECIFIC CAPITAL (RICARDO-VINER) MODEL ASSUMPTIONS Two goods, two countries. Goods can be traded but not factors across countries. Capital specific to sectors,

More information

Introduction. Externalities - I. Joint Effects. Joint Products. Review:

Introduction. Externalities - I. Joint Effects. Joint Products. Review: Introduction Externalities - I Philip A. Viton May 24, 2012 Review: Condition M : markets exist. (for everything in individuals utility functions or firms production functions). Theorem: If Condition M

More information

The Difference Between Market and Barter: Money and the Making of Markets

The Difference Between Market and Barter: Money and the Making of Markets The Difference Between Market and Barter: 2 Money and the Making of Markets Market is in many respects distinct from barter. This distinction needs to be emphasized, because the conventional theory treats

More information

A Two-Period Model of the Current Account Obstfeld and Rogo, Chapter 1

A Two-Period Model of the Current Account Obstfeld and Rogo, Chapter 1 A Two-Period Model of the Current Account Obstfeld and Rogo, Chapter 1 1 Small Open Endowment Economy 1.1 Consumption Optimization problem maximize U i 1 = u c i 1 + u c i 2 < 1 subject to the budget constraint

More information