ACCPT3- General Equilibrium Flashcards

Question 1

Q

Is our analysis of general equilibrium under the assumption of perfect competition?

Question 2

Q

Which 3 different kinds of economy are we going to be looking at?

Answer

A

Pure exchange economy
Pure production economy
A production and exchange economy

Question 3

Q

What is Pareto improvement and how can this be seen on a graph?

Answer

A

A Pareto improvement would be making at least one person better off, without making another person worse off.
On a graph this would be any area above or to the right of a Pareto inefficient outcome.

Question 4

Q

What is Pareto efficiency and how can this be seen on a graph?

Answer

A

Pareto efficiency is when there are no more Pareto improvements available; there is no way to make one person better off without making another person worse off
On a graph, the point would already be on its PPF line.

Question 5

Q

What does the Edgeworth box illustrate? List 5

Answer

A

2 goods: x and y
2 consumers A and B
With endowment (xA,yA ) and (xB,yB), respectively
Each has preferences represented by the indifference curves which for each individual are convex to their respective origin
Consumers maximise utility and are allowed to trade their endowments with each other as price takers

Question 6

Q

In the Edgeworth box, what are the slopes of the indifference curves for individuals A and B

Answer

A

Individual A’s indifference curve has a slope of -MRSaxy

* Individual B’s indifference curve has a slope of -MRSbyx

Question 7

Q

In the Edgeworth box, at which points are no further Pareto improvements possible, and how can this be written?

Answer

A

No further Pareto improvements can be made at the point where both individual’s indifference curves are tangential to eachother
MRSaxy = MRSbxy = MRS ixy (i = A,B)
This is the Pareto efficient outcome.

Question 8

Q

What is MRSaxy and MRSbxy also equal to at the Pareto efficient outcome?

Question 9

Q

MRSaxy = MRSbxy = -Px/Py is also known as what?

Answer

A

Consumption efficiency

Question 10

Q

What is the line joining all the Pareto efficient and Consumption Efficient points between A and B called?

Answer

A

The contract curve.

Question 11

Q

What is another way of drawing this contract curve?

Answer

A

As a Utility Possibility Frontier

Question 12

Q

What does the story in a Pure Production Economy show? List 5

Answer

A

Two goods x and y
Each produced by a different firm (labelled the same as the good they produce)
Each firm has an endowment of inputs labour and capital
Firms have isoquants that are convex to their respective origins, y and x,
Firms are price takers but can trade inputs

Question 13

Q

All points on the Production Economy contract curve are what? And how can this be written?

Answer

A

They are all production efficient
They are also all Pareto efficient
MRTSxlk= MRTSylk = w/r = MRTSilk (i = x,y)

Question 14

Q

What does w/r stand for?

Answer

A

The wage rental ratio

Question 15

Q

What else does MRTxlk= MRTSylk = w/r =?

Answer

A

Minus the slope of the isoquants

Question 16

Q

What do points on the Production Economy contract curve satisfy?

Answer

Study These Flashcards

A

Production efficiency

Question 17

Q

If we put all of these contract curve points onto a 2 axes graph with just x and y, what do we get?

Answer

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A

The Production Possibility Frontier

Question 18

Q

What is a complication of a Production and Exchange economy and why?

Answer

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A

All points on the contract curves for production and exchange will no longer be Pareto efficient
It is necessary for the economy to be at a point on the exchange contract curve as well as a point on the production contract curve where both sectors of the economy are trading at the same economic rate.