Chapter Thirty. Production
|
|
- Randolph Small
- 5 years ago
- Views:
Transcription
1 Chapter Thirty Production
2 Exchange Economies (revisited) No production, only endowments, so no description of how resources are converted to consumables. General equilibrium: all markets clear simultaneously. 1st and 2nd Fundamental Theorems of Welfare Economics.
3 Now Add Production... Add input markets, output markets, describe firms technologies, the distributions of firms outputs and profits
4 Now Add Production... Add input markets, output markets, describe firms technologies, the distributions of firms outputs and profits That s not easy!
5 Robinson Crusoe s Economy One agent, RC. Endowed with a fixed quantity of one resource hours. Use time for labor (production) or leisure (consumption). Labor time = L. Leisure time = 24 - L. What will RC choose?
6 Robinson Crusoe s Technology Technology: Labor produces output (coconuts) according to a concave production function.
7 Robinson Crusoe s Technology Production function 0 24 Labor (hours)
8 Robinson Crusoe s Technology Production function Feasible production plans 0 24 Labor (hours)
9 Robinson Crusoe s Preferences RC s preferences: coconut is a good leisure is a good
10 Robinson Crusoe s Preferences More preferred 0 24 Leisure (hours)
11 Robinson Crusoe s Preferences More preferred 24 0 Leisure (hours)
12 Robinson Crusoe s Choice Production function Feasible production plans 0 24 Labor (hours)
13 Robinson Crusoe s Choice Production function Feasible production plans Labor (hours) Leisure (hours)
14 Robinson Crusoe s Choice Production function Feasible production plans Labor (hours) Leisure (hours)
15 Robinson Crusoe s Choice Production function Feasible production plans Labor (hours) Leisure (hours)
16 Robinson Crusoe s Choice C* Production function 0 L* Labor (hours) Leisure (hours)
17 Robinson Crusoe s Choice C* Production function Labor 0 L* Labor (hours) Leisure (hours)
18 Robinson Crusoe s Choice C* Production function Labor Leisure 0 L* Labor (hours) Leisure (hours)
19 Robinson Crusoe s Choice C* Labor Output Leisure 0 L* Production function Labor (hours) Leisure (hours)
20 Robinson Crusoe s Choice MRS = MP L C* Labor Output Leisure 0 L* Production function Labor (hours) Leisure (hours)
21 Robinson Crusoe as a Firm Now suppose RC is both a utilitymaximizing consumer and a profitmaximizing firm. Use coconuts as the numeraire good; i.e. price of a coconut = $1. RC s wage rate is w. Coconut output level is C.
22 Robinson Crusoe as a Firm RC s firm s profit is = C - wl. = C - wl C = + wl, the equation of an isoprofit line. Slope = + w. Intercept =.
23 Isoprofit Lines Higher profit; C wl Slopes = + w 0 24 Labor (hours)
24 Profit-Maximization Production function 0 Feasible production plans 24 Labor (hours)
25 Profit-Maximization Production function 0 24 Labor (hours)
26 Profit-Maximization Production function 0 24 Labor (hours)
27 Profit-Maximization C* Production function 0 L* 24 Labor (hours)
28 Profit-Maximization Isoprofit slope = production function slope C* Production function 0 L* 24 Labor (hours)
29 Profit-Maximization Isoprofit slope = production function slope i.e. w = MP L C* Production function 0 L* 24 Labor (hours)
30 Profit-Maximization Isoprofit slope = production function slope i.e. w = MP L = 1 MP L = MRP L. C* Production function 0 L* 24 Labor (hours)
31 Profit-Maximization Isoprofit slope = production function slope i.e. w = MP L = 1 MP L = MRP L. C* * Production function 0 RC gets L* 24 * C * wl * Labor (hours)
32 Profit-Maximization Isoprofit slope = production function slope i.e. w = MP L = 1 MP L = MRP L. C* * Labor demand Production function Given w, RC s firm s quantity demanded of labor is L* 0 RC gets L* 24 * C * wl * Labor (hours)
33 Profit-Maximization Isoprofit slope = production function slope i.e. w = MP L = 1 MP L = MRP L. C* * Labor demand Output supply Production function Given w, RC s firm s quantity demanded of labor is L* and output quantity supplied is C*. 0 RC gets L* 24 * C * wl * Labor (hours)
34 Utility-Maximization Now consider RC as a consumer endowed with $ * who can work for $w per hour. What is RC s most preferred consumption bundle? Budget constraint is C * wl.
35 Utility-Maximization * Budget constraint C * wl Labor (hours)
36 Utility-Maximization * Budget constraint; slope = w C * wl Labor (hours)
37 Utility-Maximization More preferred 0 24 Labor (hours)
38 Utility-Maximization * Budget constraint; slope = w C * wl Labor (hours)
39 Utility-Maximization * Budget constraint; slope = w C * wl Labor (hours)
40 Utility-Maximization C* * Budget constraint; slope = w C * wl. 0 L* 24 Labor (hours)
41 Utility-Maximization C* * MRS = w Budget constraint; slope = w C * wl. 0 L* 24 Labor (hours)
42 Utility-Maximization C* * MRS = w Labor supply Budget constraint; slope = w C * wl. Given w, RC s quantity supplied of labor is L* 0 L* 24 Labor (hours)
43 Utility-Maximization C* * MRS = w Labor supply Output demand Budget constraint; slope = w C * wl. Given w, RC s quantity supplied of labor is L* and output quantity demanded is C*. 0 L* 24 Labor (hours)
44 Utility-Maximization & Profit- Maximization Profit-maximization: w = MP L quantity of output supplied = C* quantity of labor demanded = L*
45 Utility-Maximization & Profit- Maximization Profit-maximization: w = MP L quantity of output supplied = C* quantity of labor demanded = L* Utility-maximization: w = MRS quantity of output demanded = C* quantity of labor supplied = L*
46 Utility-Maximization & Profit- Maximization Profit-maximization: Coconut and labor w = MP L markets both clear. quantity of output supplied = C* quantity of labor demanded = L* Utility-maximization: w = MRS quantity of output demanded = C* quantity of labor supplied = L*
47 Utility-Maximization & Profit- C* * Maximization MRS = w = MP L Given w, RC s quantity supplied of labor = quantity demanded of labor = L* and output quantity demanded = output quantity supplied = C*. 0 L* 24 Labor (hours)
48 Pareto Efficiency Must have MRS = MP L.
49 Pareto Efficiency MRS MP L 0 24 Labor (hours)
50 Pareto Efficiency MRS MP L Preferred consumption bundles Labor (hours)
51 Pareto Efficiency MRS = MP L 0 24 Labor (hours)
52 Pareto Efficiency MRS = MP L. The common slope relative wage rate w that implements the Pareto efficient plan by decentralized pricing Labor (hours)
53 First Fundamental Theorem of Welfare Economics A competitive market equilibrium is Pareto efficient if consumers preferences are convex there are no externalities in consumption or production.
54 Second Fundamental Theorem of Welfare Economics Any Pareto efficient economic state can be achieved as a competitive market equilibrium if consumers preferences are convex firms technologies are convex there are no externalities in consumption or production.
55 Non-Convex Technologies Do the Welfare Theorems hold if firms have non-convex technologies?
56 Non-Convex Technologies Do the Welfare Theorems hold if firms have non-convex technologies? The 1st Theorem does not rely upon firms technologies being convex.
57 Non-Convex Technologies MRS = MP L The common slope relative wage rate w that implements the Pareto efficient plan by decentralized pricing Labor (hours)
58 Non-Convex Technologies Do the Welfare Theorems hold if firms have non-convex technologies? The 2nd Theorem does require that firms technologies be convex.
59 Non-Convex Technologies MRS = MP L. The Pareto optimal allocation cannot be implemented by a competitive equilibrium Labor (hours)
60 Production Possibilities Resource and technological limitations restrict what an economy can produce. The set of all feasible output bundles is the economy s production possibility set. The set s outer boundary is the production possibility frontier.
61 Production Possibilities Production possibility frontier (ppf) Fish
62 Production Possibilities Production possibility frontier (ppf) Production possibility set Fish
63 Production Possibilities Feasible but inefficient Fish
64 Production Possibilities Feasible and efficient Feasible but inefficient Fish
65 Production Possibilities Feasible and efficient Feasible but inefficient Infeasible Fish
66 Production Possibilities Ppf s slope is the marginal rate of product transformation. Fish
67 Production Possibilities Ppf s slope is the marginal rate of product transformation. Increasingly negative MRPT increasing opportunity cost to specialization. Fish
68 Production Possibilities If there are no production externalities then a ppf will be concave w.r.t. the origin. Why?
69 Production Possibilities If there are no production externalities then a ppf will be concave w.r.t. the origin. Why? Because efficient production requires exploitation of comparative advantages.
70 Comparative Advantage Two agents, RC and Man Friday (MF). RC can produce at most 20 coconuts or 30 fish. MF can produce at most 50 coconuts or 25 fish.
71 C Comparative Advantage RC 20 C MF F 25 F
72 20 C Comparative Advantage RC MRPT = -2/3 coconuts/fish so opp. cost of one more fish is 2/3 foregone coconuts. C MF F 25 F
73 20 C Comparative Advantage RC MRPT = -2/3 coconuts/fish so opp. cost of one more fish is 2/3 foregone coconuts. C MF F MRPT = -2 coconuts/fish so opp. cost of one more fish is 2 foregone coconuts. 25 F
74 20 C Comparative Advantage RC MRPT = -2/3 coconuts/fish so opp. cost of one more fish is 2/3 foregone coconuts. C MF F RC has the comparative opp. cost advantage in producing fish. MRPT = -2 coconuts/fish so opp. cost of one more fish is 2 foregone coconuts. 25 F
75 20 C Comparative Advantage RC MRPT = -2/3 coconuts/fish so opp. cost of one more coconut is 3/2 foregone fish. C MF F 25 F
76 20 C Comparative Advantage RC MRPT = -2/3 coconuts/fish so opp. cost of one more coconut is 3/2 foregone fish. C MF F MRPT = -2 coconuts/fish so opp. cost of one more coconut is 1/2 foregone fish. 25 F
77 20 C Comparative Advantage RC MRPT = -2/3 coconuts/fish so opp. cost of one more coconut is 3/2 foregone fish. C MF F MRPT = -2 coconuts/fish so opp. cost of one more coconut is 1/2 foregone fish. 25 F MF has the comparative opp. cost advantage in producing coconuts.
78 C 20 C 50 Comparative Advantage RC 30 MF F C Economy Use RC to produce fish before using MF. Use MF to produce coconuts before using RC. 25 F F
79 C 20 C 50 Comparative Advantage RC 30 MF F C Economy Using low opp. cost producers first results in a ppf that is concave w.r.t the origin. 25 F F
80 Comparative Advantage More producers with different opp. costs smooth out the ppf. C Economy F
81 Coordinating Production & Consumption The ppf contains many technically efficient output bundles. Which are Pareto efficient for consumers?
82 Coordinating Production & C Consumption Output bundle is ( F, C ) F Fish
83 Coordinating Production & C Consumption ( F, C ) Output bundle is and is the aggregate endowment for distribution to consumers RC and MF. F Fish
84 Coordinating Production & C Consumption O MF ( F, C ) Output bundle is and is the aggregate endowment for distribution to consumers RC and MF. O RC F Fish
85 Coordinating Production & C Consumption O MF ( F, C ) ( F, C ) Allocate efficiently; say to RC RC RC C RC O RC F RC F Fish
86 Coordinating Production & C F MF Consumption O MF ( F, C ) Allocate efficiently; say ( FRC, CRC ) to RC and to MF. ( F, C ) MF MF C RC C MF O RC F RC F Fish
87 Coordinating Production & C F MF Consumption O MF C RC C MF O RC F RC F Fish
88 Coordinating Production & C F MF Consumption O MF C RC C MF O RC F RC F Fish
89 Coordinating Production & C F MF Consumption O MF C RC C MF O RC F RC F Fish
90 Coordinating Production & C F MF Consumption O MF MRS MRPT C RC C MF O RC F RC F Fish
91 Coordinating Production & C C F MF Consumption O MF Instead produce O MF ( F, C ). C RC C MF O RC F RC F F Fish
92 Coordinating Production & C C F MF Consumption O MF Instead produce O MF ( F, C ). C RC C MF O RC F RC F F Fish
93 Coordinating Production & C C F MF Consumption O MF F MF Instead produce ( F, C ). Give MF same allocation O MF as before. C RC C MF C MF O RC F RC F F Fish
94 Coordinating Production & C C C RC F MF Consumption O MF F MF C MF Instead produce ( F, C ). Give MF same allocation O MF as before. MF s utility is unchanged. C MF O RC F RC F F Fish
95 Coordinating Production & C Consumption O MF F MF Instead produce ( F, C ). Give MF same allocation O MF as before. MF s utility is unchanged C MF O RC F Fish
96 Coordinating Production & C C RC Consumption O MF F MF Instead produce ( F, C ). Give MF same allocation O MF as before. MF s utility is unchanged C MF O RC F RC F Fish
97 Coordinating Production & C C RC Consumption O MF F MF Instead produce ( F, C ). Give MF same allocation O MF as before. MF s utility is unchanged, RC s utility is higher C MF O RC F RC F Fish
98 Coordinating Production & C C RC Consumption O MF F MF Instead produce ( F, C ). Give MF same allocation O MF as before. MF s utility is unchanged, RC s utility is higher; C MF Pareto improvement. O RC F RC F Fish
99 Coordinating Production & Consumption MRS MRPT inefficient coordination of production and consumption. Hence, MRS = MRPT is necessary for a Pareto optimal economic state.
100 Coordinating Production & Consumption C F MF O MF C RC C MF O RC F RC F Fish
101 Decentralized Coordination of Production & Consumption RC and MF jointly run a firm producing coconuts and fish. RC and MF are also consumers who can sell labor. Price of coconut = p C. Price of fish = p F. RC s wage rate = w RC. MF s wage rate = w MF.
102 Decentralized Coordination of Production & Consumption L RC, L MF are amounts of labor purchased from RC and MF. Firm s profit-maximization problem is choose C, F, L RC and L MF to max p C p F w L w L. C F RC RC MF MF
103 Decentralized Coordination of Production & Consumption max pc C pf F wrc LRC wmf LMF. Isoprofit line equation is constant p C p F w L w L C F RC RC MF MF
104 Decentralized Coordination of Production & Consumption max pc C pf F wrc LRC wmf LMF. Isoprofit line equation is constant p C p F w L w L which rearranges to C C F RC RC MF MF w L w L p RC RC MF MF C p p F C F.
105 Decentralized Coordination of Production & Consumption max pc C pf F wrc LRC wmf LMF. Isoprofit line equation is constant p C p F w L w L which rearranges to C C F RC RC MF MF wrc LRC wmf LMF p F p 2 p F. C C intercept slope
106 Decentralized Coordination of Production & Consumption Higher profit Slopes = p p F C Fish
107 Decentralized Coordination of Production & Consumption The firm s production possibility set. Fish
108 Decentralized Coordination of Production & Consumption Slopes = p p F C Fish
109 Decentralized Coordination of Production & Consumption Profit-max. plan Slopes = p p F C Fish
110 Decentralized Coordination of Production & Consumption Profit-max. plan Slope = p p F C Fish
111 Decentralized Coordination of Production & Consumption Competitive markets and profit-maximization p MRPT F. p C Profit-max. plan Slope = p F pc Fish
112 Decentralized Coordination of Production & Consumption So competitive markets, profitmaximization, and utility maximization all together cause MRPT p F MRS, p C the condition necessary for a Pareto optimal economic state.
113 Decentralized Coordination of C Production & Consumption F MF O MF Competitive markets and utility-maximization MRS p F. p C C RC C MF O RC F RC F Fish
114 Decentralized Coordination of C Production & Consumption F MF Competitive markets, utilitymaximization and profitmaximization O MF p MRS F MRPT. p C C RC C MF O RC F RC F Fish
Microeconomics IV. First Semster, Course
Microeconomics IV Part II. General Professor: Marc Teignier Baqué Universitat de Barcelona, Facultat de Ciències Econòmiques and Empresarials, Departament de Teoria Econòmica First Semster, Course 2014-2015
More information2. Equlibrium and Efficiency
2. Equlibrium and Efficiency 1 2.1 Introduction competition and efficiency Smith s invisible hand model of competitive economy combine independent decision-making of consumers and firms into a complete
More informationChapter 11: General Competitive Equilibrium
Chapter 11: General Competitive Equilibrium Economies of Scope Constant Returns to Scope Diseconomies of Scope Production Possibilities Frontier Opportunity Cost Condition Marginal Product Condition Comparative
More information1. Suppose a production process is described by a Cobb-Douglas production function f(v 1, v 2 ) = v 1 1/2 v 2 3/2.
1. Suppose a production process is described by a Cobb-Douglas production function f(v 1, v 2 ) = v 1 1/2 v 2 3/2. a. Write an expression for the marginal product of v 1. Does the marginal product of v
More informationThe Robinson Crusoe model; the Edgeworth Box in Consumption and Factor allocation
Econ 200B UCSD; Prof. R. Starr, Ms. Kaitlyn Lewis, Winter 2017; Notes-Syllabus I1 Notes for Syllabus Section I: The Robinson Crusoe model; the Edgeworth Box in Consumption and Factor allocation Overview:
More informationA Closed Economy One-Period Macroeconomic Model
A Closed Economy One-Period Macroeconomic Model Chapter 5 Topics in Macroeconomics 2 Economics Division University of Southampton February 21, 2008 Chapter 5 1/40 Topics in Macroeconomics Closing the Model
More informationECON 200 EXERCISES. (b) Appeal to any propositions you wish to confirm that the production set is convex.
ECON 00 EXERCISES 3. ROBINSON CRUSOE ECONOMY 3.1 Production set and profit maximization. A firm has a production set Y { y 18 y y 0, y 0, y 0}. 1 1 (a) What is the production function of the firm? HINT:
More informationChapter 4 Topics. Behavior of the representative consumer Behavior of the representative firm Pearson Education, Inc.
Chapter 4 Topics Behavior of the representative consumer Behavior of the representative firm 1-1 Representative Consumer Consumer s preferences over consumption and leisure as represented by indifference
More informationThe Static Model. Consumer Assumptions on the preferences: Consumer. A description of the Model Economy
A description of the Model Economy Static: decisions are made for only one time period. Representative Representative Consumer Firm The Static Model Dr. Ana Beatriz Galvao; Business Cycles; Lecture 2;
More informationEconomics 201B Second Half. Lecture 4, 3/18/10
Economics 201B Second Half Lecture 4, 3/18/10 The Robinson Crusoe Model: Simplest Model Incorporating Production 1consumer 1 firm, owned by the consumer Both the consumer and firm act as price-takers (silly
More informationUnderstand general-equilibrium relationships, such as the relationship between barriers to trade, and the domestic distribution of income.
Review of Production Theory: Chapter 2 1 Why? Understand the determinants of what goods and services a country produces efficiently and which inefficiently. Understand how the processes of a market economy
More informationMicroeconomics Review in a Two Good World
Economics 131 ection Notes GI: David Albouy Microeconomics Review in a Two Good World Note: These notes are not meant to be a substitute for attending section. It may in fact be difficult to understand
More informationThe endowment of the island is given by. e b = 2, e c = 2c 2.
Economics 121b: Intermediate Microeconomics Problem Set 4 1. Edgeworth Box and Pareto Efficiency Consider the island economy with Friday and Robinson. They have agreed to share their resources and they
More informationReview of Production Theory: Chapter 2 1
Review of Production Theory: Chapter 2 1 Why? Trade is a residual (EX x = Q x -C x; IM y= C y- Q y) Understand the determinants of what goods and services a country produces efficiently and which inefficiently.
More informationGENERAL EQUILIBRIUM. Wanna Download D. Salvatore, International Economics for free? Gr8, visit now jblogger2016.wordpress.com
Wanna Download D. Salvatore, International Economics for free? Gr8, visit now jblogger2016.wordpress.com PDF Version of Lecture Notes by jblogger2016 GENERAL EQUILIBRIUM FIRM AND HOUSEHOLD DECISIONS Input
More informationChapter 3 Introduction to the General Equilibrium and to Welfare Economics
Chapter 3 Introduction to the General Equilibrium and to Welfare Economics Laurent Simula ENS Lyon 1 / 54 Roadmap Introduction Pareto Optimality General Equilibrium The Two Fundamental Theorems of Welfare
More informationChoice. A. Optimal choice 1. move along the budget line until preferred set doesn t cross the budget set. Figure 5.1.
Choice 34 Choice A. Optimal choice 1. move along the budget line until preferred set doesn t cross the budget set. Figure 5.1. Optimal choice x* 2 x* x 1 1 Figure 5.1 2. note that tangency occurs at optimal
More informationECON 3020 Intermediate Macroeconomics
ECON 3020 Intermediate Macroeconomics Chapter 5 A Closed-Economy One-Period Macroeconomic Model Instructor: Xiaohui Huang Department of Economics University of Virginia c Copyright 2014 Xiaohui Huang.
More informationChapter 4. Consumer and Firm Behavior: The Work- Leisure Decision and Profit Maximization. Copyright 2014 Pearson Education, Inc.
Chapter 4 Consumer and Firm Behavior: The Work- Leisure Decision and Profit Maximization Copyright Chapter 4 Topics Behavior of the representative consumer Behavior of the representative firm 1-2 Representative
More informationLecture 15 - General Equilibrium with Production
Lecture 15 - General Equilibrium with Production 14.03 Spring 2003 1 General Equilibrium with Production 1.1 Motivation We have already discussed general equilibrium in a pure exchange economy, and seen
More informationConsumption and Saving
Chapter 4 Consumption and Saving 4.1 Introduction Thus far, we have focussed primarily on what one might term intratemporal decisions and how such decisions determine the level of GDP and employment at
More informationBuying and Selling. Chapter Nine. Endowments. Buying and Selling. Buying and Selling
Buying and Selling Chapter Nine Buying and Selling Trade involves exchange -- when something is bought something else must be sold. What will be bought? What will be sold? Who will be a buyer? Who will
More informationChapter 12 GENERAL EQUILIBRIUM AND WELFARE. Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved.
Chapter 12 GENERAL EQUILIBRIUM AND WELFARE Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. 1 Perfectly Competitive Price System We will assume that all markets are
More informationAnswers to Microeconomics Prelim of August 24, In practice, firms often price their products by marking up a fixed percentage over (average)
Answers to Microeconomics Prelim of August 24, 2016 1. In practice, firms often price their products by marking up a fixed percentage over (average) cost. To investigate the consequences of markup pricing,
More informationFundamental Theorems of Welfare Economics
Fundamental Theorems of Welfare Economics Ram Singh October 4, 015 This Write-up is available at photocopy shop. Not for circulation. In this write-up we provide intuition behind the two fundamental theorems
More informationECON MACROECONOMIC THEORY Instructor: Dr. Juergen Jung Towson University. J.Jung Chapter 5 - Closed Economy Model Towson University 1 / 47
ECON 310 - MACROECONOMIC THEORY Instructor: Dr. Juergen Jung Towson University J.Jung Chapter 5 - Closed Economy Model Towson University 1 / 47 Disclaimer These lecture notes are customized for Intermediate
More informationExchange. M. Utku Ünver Micro Theory. Boston College. M. Utku Ünver Micro Theory (BC) Exchange 1 / 23
Exchange M. Utku Ünver Micro Theory Boston College M. Utku Ünver Micro Theory (BC) Exchange 1 / 23 General Equilibrium So far we have been analyzing the behavior of a single consumer. In this chapter,
More informationChapter 5. A Closed- Economy One-Period Macroeconomic. Model. Copyright 2014 Pearson Education, Inc.
Chapter 5 A Closed- Economy One-Period Macroeconomic Model Copyright Chapter 5 Topics Introduce the government. Construct closed-economy one-period macroeconomic model, which has: (i) representative consumer;
More informationd. Find a competitive equilibrium for this economy. Is the allocation Pareto efficient? Are there any other competitive equilibrium allocations?
Answers to Microeconomics Prelim of August 7, 0. Consider an individual faced with two job choices: she can either accept a position with a fixed annual salary of x > 0 which requires L x units of labor
More informationFinancial vs physical capital
Investment Financial vs physical capital In the consumption-saving model studied earlier, we studied the role of financial capital and investment. Financial capital consists of IOUs like stocks, bonds,
More informationEconomics 370 Microeconomic Theory Problem Set 5 Answer Key
Economics 370 Microeconomic Theory Problem Set 5 Answer Key 1) In order to protect the wild populations of cockatoos, the Australian authorities have outlawed the export of these large parrots. An illegal
More informationExogenous variables are determined outside a macroeconomic model. Figure 5.1 A Model Takes Exogenous Variables and Determines Endogenous Variables
Chapter 5 A Closed-Economy One-Period Macroeconomic Model What is a model used for? Exogenous variables are determined outside a macroeconomic model. Figure 5.1 A Model Takes Exogenous Variables and Determines
More informationTrade on Markets. Both consumers' initial endowments are represented bythesamepointintheedgeworthbox,since
Trade on Markets A market economy entails ownership of resources. The initial endowment of consumer 1 is denoted by (x 1 ;y 1 ), and the initial endowment of consumer 2 is denoted by (x 2 ;y 2 ). Both
More information1 Multiple Choice (30 points)
1 Multiple Choice (30 points) Answer the following questions. You DO NOT need to justify your answer. 1. (6 Points) Consider an economy with two goods and two periods. Data are Good 1 p 1 t = 1 p 1 t+1
More informationLecture 12 International Trade. Noah Williams
Lecture 12 International Trade Noah Williams University of Wisconsin - Madison Economics 702 Spring 2018 International Trade Two important reasons for international trade: Static ( microeconomic ) Different
More informationA. Introduction to choice under uncertainty 2. B. Risk aversion 11. C. Favorable gambles 15. D. Measures of risk aversion 20. E.
Microeconomic Theory -1- Uncertainty Choice under uncertainty A Introduction to choice under uncertainty B Risk aversion 11 C Favorable gambles 15 D Measures of risk aversion 0 E Insurance 6 F Small favorable
More informationWe want to solve for the optimal bundle (a combination of goods) that a rational consumer will purchase.
Chapter 3 page1 Chapter 3 page2 The budget constraint and the Feasible set What causes changes in the Budget constraint? Consumer Preferences The utility function Lagrange Multipliers Indifference Curves
More informationGE in production economies
GE in production economies Yossi Spiegel Consider a production economy with two agents, two inputs, K and L, and two outputs, x and y. The two agents have utility functions (1) where x A and y A is agent
More informationGeneral Equilibrium and Economic Welfare
General Equilibrium and Economic Welfare Lecture 7 Reading: Perlo Chapter 10 August 2015 1 / 61 Introduction Shocks a ect many markets at the same time. Di erent markets feed back into each other. Today,
More informationEcon 1101 Spring 2013 Week 10. Section 038 3/27/2013
Econ 1101 Spring 2013 Week 10 Section 038 3/27/2013 nnouncements Homework due on plia this Friday! In recitation this week: Consumer theory worksheet that is very helpful for understanding consumer theory.
More informationConsumers cannot afford all the goods and services they desire. Consumers are limited by their income and the prices of goods.
Budget Constraint: Review Consumers cannot afford all the goods and services they desire. Consumers are limited by their income and the prices of goods. Model Assumption: Consumers spend all their income
More informationChapter 2 Equilibrium and Efficiency
Chapter Equilibrium and Efficiency Reading Essential reading Hindriks, J and G.D. Myles Intermediate Public Economics. (Cambridge: MIT Press, 005) Chapter. Further reading Duffie, D. and H. Sonnenschein
More informationProblem Set 2. Theory of Banking - Academic Year Maria Bachelet March 2, 2017
Problem Set Theory of Banking - Academic Year 06-7 Maria Bachelet maria.jua.bachelet@gmai.com March, 07 Exercise Consider an agency relationship in which the principal contracts the agent, whose effort
More informationAS/ECON AF Answers to Assignment 1 October Q1. Find the equation of the production possibility curve in the following 2 good, 2 input
AS/ECON 4070 3.0AF Answers to Assignment 1 October 008 economy. Q1. Find the equation of the production possibility curve in the following good, input Food and clothing are both produced using labour and
More information1 Two Period Exchange Economy
University of British Columbia Department of Economics, Macroeconomics (Econ 502) Prof. Amartya Lahiri Handout # 2 1 Two Period Exchange Economy We shall start our exploration of dynamic economies with
More informationGains from Trade. Rahul Giri
Gains from Trade Rahul Giri Contact Address: Centro de Investigacion Economica, Instituto Tecnologico Autonomo de Mexico (ITAM). E-mail: rahul.giri@itam.mx An obvious question that we should ask ourselves
More informationLecture 9(i) Announcements. Effects. oe with. and
Lecture 9(i) Announcements Work on Consumer Theory worksheet (at week 9 on Moodle) before recitation. Midterm coming up. Can start looking at practice midterms (at week on Moodle). Lecture. Effects of
More informationChapter 31: Exchange
Econ 401 Price Theory Chapter 31: Exchange Instructor: Hiroki Watanabe Summer 2009 1 / 53 1 Introduction General Equilibrium Positive & Normative Pure Exchange Economy 2 Edgeworth Box 3 Adding Preferences
More informationInternational Economics Lecture 2: The Ricardian Model
International Economics Lecture 2: The Ricardian Model Min Hua & Yiqing Xie School of Economics Fudan University Mar. 5, 2014 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, 2014
More informationAnswers to June 11, 2012 Microeconomics Prelim
Answers to June, Microeconomics Prelim. Consider an economy with two consumers, and. Each consumer consumes only grapes and wine and can use grapes as an input to produce wine. Grapes used as input cannot
More informationLecture 2 General Equilibrium Models: Finite Period Economies
Lecture 2 General Equilibrium Models: Finite Period Economies Introduction In macroeconomics, we study the behavior of economy-wide aggregates e.g. GDP, savings, investment, employment and so on - and
More informationInflation. David Andolfatto
Inflation David Andolfatto Introduction We continue to assume an economy with a single asset Assume that the government can manage the supply of over time; i.e., = 1,where 0 is the gross rate of money
More informationIntroductory to Microeconomic Theory [08/29/12] Karen Tsai
Introductory to Microeconomic Theory [08/29/12] Karen Tsai What is microeconomics? Study of: Choice behavior of individual agents Key assumption: agents have well-defined objectives and limited resources
More informationDepartment of Economics The Ohio State University Final Exam Answers Econ 8712
Department of Economics The Ohio State University Final Exam Answers Econ 8712 Prof. Peck Fall 2015 1. (5 points) The following economy has two consumers, two firms, and two goods. Good 2 is leisure/labor.
More informationMicroeconomics (Externalities Ch 34 (Varian))
Microeconomics (Externalities Ch 34 (Varian)) Microeconomics (Externalities Ch 34 (Varian)) Lectures 25 & 26 Apr 20 & 24, 2017 Microeconomics (Externalities Ch 34 (Varian)) Qs(1). In a certain textile
More informationChapter 6. Production. Introduction. Production Decisions of a Firm. Production Decisions of a Firm
Chapter 6 Production Introduction Our study of consumer behavior was broken down into 3 steps Describing consumer preferences Consumers face budget constraints Consumers choose to maximize utility Production
More informationLecture 10: Two-Period Model
Lecture 10: Two-Period Model Consumer s consumption/savings decision responses of consumer to changes in income and interest rates. Government budget deficits and the Ricardian Equivalence Theorem. Budget
More informationReview of General Economic Principles. Review Notes from AGB 212
Review of General Economic Principles Review Notes from AGB 212 1 Agenda Production Theory One input, one output Production Theory Two inputs, one output Production Theory One input, two outputs 2 The
More informationTheoretical Tools of Public Finance. 131 Undergraduate Public Economics Emmanuel Saez UC Berkeley
Theoretical Tools of Public Finance 131 Undergraduate Public Economics Emmanuel Saez UC Berkeley 1 THEORETICAL AND EMPIRICAL TOOLS Theoretical tools: The set of tools designed to understand the mechanics
More informationPRODUCTION COSTS. Econ 311 Microeconomics 1 Lecture Material Prepared by Dr. Emmanuel Codjoe
PRODUCTION COSTS In this section we introduce production costs into the analysis of the firm. So far, our emphasis has been on the production process without any consideration of costs. However, production
More informationQuiz I Topics in Macroeconomics 2 Econ 2004
Quiz I Topics in Macroeconomics 2 Econ 2004 You have 35 min to complete the quiz. Please write the letter of your answer choice in the space provided on this COLOURED FRONT SHEET!. Clearly write your name
More informationECO 100Y L0101 INTRODUCTION TO ECONOMICS. Midterm Test #2
Department of Economics Prof. Gustavo Indart University of Toronto December 3, 2004 SOLUTIONS ECO 100Y L0101 INTRODUCTION TO ECONOMICS Midterm Test #2 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS:
More informationConsumer Theory. The consumer s problem: budget set, interior and corner solutions.
Consumer Theory The consumer s problem: budget set, interior and corner solutions. 1 The consumer s problem The consumer chooses the consumption bundle that maximizes his welfare (that is, his utility)
More informationConsumption, Investment and the Fisher Separation Principle
Consumption, Investment and the Fisher Separation Principle Consumption with a Perfect Capital Market Consider a simple two-period world in which a single consumer must decide between consumption c 0 today
More informationWinter 2016 Economics 304 Name Quiz 6
Winter 2016 Economics 304 Name Quiz 6 Instructions: Put all books and notes away. Circle the letter of the choice that best answers the question. If you need scratch paper, just use blank space on the
More informationECON 3020 Intermediate Macroeconomics
ECON 3020 Intermediate Macroeconomics Chapter 4 Consumer and Firm Behavior The Work-Leisure Decision and Profit Maximization 1 Instructor: Xiaohui Huang Department of Economics University of Virginia 1
More informationPauline is considering becoming a member of a CD club, which offers discounts on CDs. There is a membership fee of 100 but then each CD is only 10.
Problem 1 (20 points) Pauline loves music. Her income is 300. Let x1 denote the quantity of CDs she buys and x2 the quantity of other goods. She has a positive marginal utility for CDs and other goods
More informationMacroeconomics I, UPF Professor Antonio Ciccone SOLUTIONS PROBLEM SET 1
Macroeconomics I, UPF Professor Antonio Ciccone SOLUTIONS PROBLEM SET 1 1.1 (from Romer Advanced Macroeconomics Chapter 1) Basic properties of growth rates which will be used over and over again. Use the
More informationECON Micro Foundations
ECON 302 - Micro Foundations Michael Bar September 13, 2016 Contents 1 Consumer s Choice 2 1.1 Preferences.................................... 2 1.2 Budget Constraint................................ 3
More informationAnswers to Assignment Ten
Answers to Assignment Ten 1. The table below shows the total production a firm will be able to obtain if it employs varying amounts of factor X while the amounts of the other factors the firm employs remain
More information1 Two Period Production Economy
University of British Columbia Department of Economics, Macroeconomics (Econ 502) Prof. Amartya Lahiri Handout # 3 1 Two Period Production Economy We shall now extend our two-period exchange economy model
More informationIntro to Economic analysis
Intro to Economic analysis Alberto Bisin - NYU 1 The Consumer Problem Consider an agent choosing her consumption of goods 1 and 2 for a given budget. This is the workhorse of microeconomic theory. (Notice
More informationConsumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization
Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization Copyright 2002 Pearson Education, Inc. and Dr Yunus Aksoy Slide 1 Discussion So far: How to measure variables of macroeconomic
More information2. A DIAGRAMMATIC APPROACH TO THE OPTIMAL LEVEL OF PUBLIC INPUTS
2. A DIAGRAMMATIC APPROACH TO THE OPTIMAL LEVEL OF PUBLIC INPUTS JEL Classification: H21,H3,H41,H43 Keywords: Second best, excess burden, public input. Remarks 1. A version of this chapter has been accepted
More informationChapter 4. Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization
Chapter 4 Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization The Representative Consumer Preferences Goods: The Consumption Good and Leisure The Utility Function More Preferred
More information9 D/S of/for Labor. 9.1 Demand for Labor. Microeconomics I - Lecture #9, April 14, 2009
Microeconomics I - Lecture #9, April 14, 2009 9 D/S of/for Labor 9.1 Demand for Labor Demand for labor depends on the price of labor, price of output and production function. In optimum a firm employs
More informationAnswer: Let y 2 denote rm 2 s output of food and L 2 denote rm 2 s labor input (so
The Ohio State University Department of Economics Econ 805 Extra Problems on Production and Uncertainty: Questions and Answers Winter 003 Prof. Peck () In the following economy, there are two consumers,
More informationUNIVERSITY OF WASHINGTON Department of Economics
Write your name: Suggested Answers UNIVERSITY OF WASHINGTON Department of Economics Economics 200, Fall 2008 Instructor: Scott First Hour Examination ***Use Brief Answers (making the key points) & Label
More informationQuiz I Topics in Macroeconomics 2 Econ 2004
Quiz I Topics in Macroeconomics 2 Econ 2004 You have 35 min to complete the quiz. Please write the letter of your answer choice in the space provided on this COLOURED FRONT SHEET!. Clearly write your name
More informationProblem Set 1 Answer Key. I. Short Problems 1. Check whether the following three functions represent the same underlying preferences
Problem Set Answer Key I. Short Problems. Check whether the following three functions represent the same underlying preferences u (q ; q ) = q = + q = u (q ; q ) = q + q u (q ; q ) = ln q + ln q All three
More informationNotes VI - Models of Economic Fluctuations
Notes VI - Models of Economic Fluctuations Julio Garín Intermediate Macroeconomics Fall 2017 Intermediate Macroeconomics Notes VI - Models of Economic Fluctuations Fall 2017 1 / 33 Business Cycles We can
More informationSign Pledge I have neither given nor received aid on this exam
Econ 3144 Fall 2010 Test 1 Dr. Rupp Name Sign Pledge I have neither given nor received aid on this exam Multiple Choice (45 questions) Identify the letter of the choice that best completes the statement
More informationChapter 4. Consumer Choice. A Consumer s Budget Constraint. Consumer Choice
Chapter 4 Consumer Choice Consumer Choice In Chapter 3, we described consumer preferences Preferences alone do not determine choices We must also specifi constraints In this chapter, we describe how consumer
More information9. Real business cycles in a two period economy
9. Real business cycles in a two period economy Index: 9. Real business cycles in a two period economy... 9. Introduction... 9. The Representative Agent Two Period Production Economy... 9.. The representative
More informationGains from Trade and Comparative Advantage
Gains from Trade and Comparative Advantage 1 Introduction Central questions: What determines the pattern of trade? Who trades what with whom and at what prices? The pattern of trade is based on comparative
More informationTopic 3: The Standard Theory of Trade. Increasing opportunity costs. Community indifference curves.
Topic 3: The Standard Theory of Trade. Outline: 1. Main ideas. Increasing opportunity costs. Community indifference curves. 2. Marginal rates of transformation and of substitution. 3. Equilibrium under
More information3 General Equilibrium in a Competitive Market
Exchange Economy. Principles of Microeconomics, Fall Chia-Hui Chen October, Lecture Efficiency in Exchange, Equity and Efficiency, and Efficiency in Production Outline. Chap : Exchange Economy. Chap :
More informationTransport Costs and North-South Trade
Transport Costs and North-South Trade Didier Laussel a and Raymond Riezman b a GREQAM, University of Aix-Marseille II b Department of Economics, University of Iowa Abstract We develop a simple two country
More informationEconomics 101A (Lecture 24) Stefano DellaVigna
Economics 101A (Lecture 24) Stefano DellaVigna April 23, 2015 Outline 1. Walrasian Equilibrium II 2. Example of General Equilibrium 3. Existence and Welfare Theorems 4. Asymmetric Information: Introduction
More informationCONSUMPTION THEORY - first part (Varian, chapters 2-7)
QUESTIONS for written exam in microeconomics. Only one answer is correct. CONSUMPTION THEORY - first part (Varian, chapters 2-7) 1. Antonio buys only two goods, cigarettes and bananas. The cost of 1 packet
More informationProblem Set 4 - Answers. Specific Factors Models
Page 1 of 5 1. In the Extreme Specific Factors Model, a. What does a country s excess demand curve look like? The PPF in the Extreme Specific Factors Model is just a point in goods space (X,Y space). Excess
More information5. COMPETITIVE MARKETS
5. COMPETITIVE MARKETS We studied how individual consumers and rms behave in Part I of the book. In Part II of the book, we studied how individual economic agents make decisions when there are strategic
More informationDepartment of Economics The Ohio State University Midterm Questions and Answers Econ 8712
Prof. James Peck Fall 06 Department of Economics The Ohio State University Midterm Questions and Answers Econ 87. (30 points) A decision maker (DM) is a von Neumann-Morgenstern expected utility maximizer.
More informationPrinciples of Finance Summer Semester 2009
Principles of Finance Summer Semester 2009 Natalia Ivanova Natalia.Ivanova@vgsf.ac.at Shota Migineishvili Shota.Migineishvili@univie.ac.at Syllabus Part 1 - Single-period random cash flows (Luenberger
More informationSyllabus for Economics 30 Public Policy Analysis Fall 2015
Syllabus for Economics 30 Public Policy Analysis Fall 2015 Dr Uri Spiegel Rm 334 McNeil Tel: 8-5178 Email: uspiegel@econ.upenn.edu Classes: MW 15.30-17 PM Office Hours: MW 13-14 PM (and by appointment)
More informationIntroduction. Countries engage in international trade for two basic reasons:
Introduction Countries engage in international trade for two basic reasons: They are different from each other in terms of climate, land, capital, labor, and technology. They try to achieve scale economies
More informationChapter 5 Criteria For Evaluation
Chapter 5 Criteria For Evaluation To choose an alternative that best achieves an objective, some criteria is required to evaluate each alternative with respect to the objective Objectives must be prioritized;
More informationis a good approximation to the growth rate of y t
Chapter 1 Introduction Overview Chapter 1 describes the macroeconomic ideas and issues that are built up throughout the text. It begins with a description of macroeconomics as the study of large collections
More informationSyllabus for Economics 30 Public Finance Fall 2014
Syllabus for Economics 30 Public Finance Fall 2014 Dr Uri Spiegel Rm 334 McNeil Tel: 8-5178 Email: uspiegel@econ.upenn.edu Classes: MW 15.30-17 PM Office Hours: MW 13-14 PM (and by appointment) Course
More informationLecture 7. The consumer s problem(s) Randall Romero Aguilar, PhD I Semestre 2018 Last updated: April 28, 2018
Lecture 7 The consumer s problem(s) Randall Romero Aguilar, PhD I Semestre 2018 Last updated: April 28, 2018 Universidad de Costa Rica EC3201 - Teoría Macroeconómica 2 Table of contents 1. Introducing
More information