week 3 term 1

Question 1

What is the focus of General Equilibrium?

Answer 1

How demand and supply in different markets interact to determine the prices of multiple goods.

Question 2

What is the focus of the Partial Equilibirum?

Answer 2

Analysig equilibrium conditions in a particular market: how demad and supply of a good is affected by the price of the particular good under consideration

Question 3

What are the three basic economic activities in most economies?

Answer 3

• Production
• Exchange
• Consumption

Question 4

What characterizes a Pure Exchange Economy?

Answer 4

• No production in the economy
• Each consumer is endowed with a certain amount of consumable goods
• Each consumer has preferences over available commodity bundles
• Agents may either consume thier endowment or engage in a barter exchnage with other agents
• Consumers act as price takers

Question 5

What is represented by an Edgeworth Box?

Answer 5

• All possible allocations of the available quantities of goods 1 and 2 between two consumers.
• endowments are given of A and B by vectors wA and wB
• the total endowment of the economy is given by the sum of the vector endowments wA and wB

Question 6

What is a feasible allocation in the Edgeworth box?

Answer 6

An allocation is feasible if the total amount of each good consumed is equal to the total amount available.

Question 7

What are the dimensions formula of the Edgeworth Box

Answer 7

HEIGHT : sum of w2
LENGTH: sum of w1

Question 8

Fill in the blank: The total endowment of good j in the economy is

Answer 8

ω¯ = ωA + ωB

Question 9

What are other feasable allocations?

Answer 9

• initial endowement allocation
• all points in the box including boundary

Question 10

What is a Pareto efficient allocation?

Answer 10

An allocation from where there is no way to make some individual strictly better off without making someone else worse off.

Question 11

Consumer A’s more prefered allocations?

Answer 11

Question 12

Consumer B’s more prefered allocations?

Answer 12

Question 13

What is a Pareto Efficient allocation?

Answer 13

1) An allocation from where there is no way to make some individual strictly better off without making someone else worse off.

2) an allocation where all gains from trade have been exhausted

3) an allocation from where are no mutually advantageous trades to be made

Question 14

What does it mean when indifference curves of two consumers are tangent to each other?

Answer 14

It indicates a Pareto Efficient allocation.
=> further trades cannot imporve the welfare of both A and B => all gains have been exhausted
=> no pareto improvement is possible from a pareto efficient allocation.

Question 15

What is Pareto Improvement

Answer 15

• is one from where one individual can be made strcilty better of without making someone else worse off

Question 16

What is the set of Pareto-improving allocations?

Answer 16

• all points in the shaded are are preferred by both consumers A and B compared to endowement point => both are better off than at endowment point

Question 17

What is the Contract Curve?

Answer 17

The set of all Pareto efficient points in the Edgeworth box.
=> it is made up of infinite tangencied between indiffernce curves - the curve is also known as the Pareto Set

Question 18

What does Trade do?

Answer 18

Trading usually improves welfare of both consumers compared to the endowment point.

=> new mutual gains to trade region is the set of all further pareto efficient reallocations.

Question 19

True or False: Consumers in a Pure Exchange Economy care about their own utility.

Answer 19

True

Question 20

What is represented by ωA and ωB in the context of an Edgeworth Box?

Answer 20

The endowments of consumers A and B respectively.

Question 21

How can we visualize allocations in the Edgeworth Box?

Answer 21

By considering the preferences of both consumers and locating feasible allocations.

Question 22

What do we call the initial endowment represented in the Edgeworth box?

Answer 22

A feasible allocation.

Question 23

What is the main characteristic of preferences in the Edgeworth Box?

Answer 23

They are usually represented by convex indifference maps.

Question 24

What does it mean for consumers to act as price takers?

Answer 24

They accept the market price as given and cannot influence it.

Question 25

What does the total consumption vector x represent?

Answer 25

The assignment of a non-negative consumption vector to each consumer.

Question 26

How do you find the contract curve?

Answer 26

By determining the Pareto efficient allocations through maximization problems ## Footnote This involves solving for utility maximization under constraints.

Question 27

What is the maximization problem for consumer A given the utility function u_i(x_i1, x_i2) = x_i1 * x_i2?

Answer 27

max x_A1, x_A2 s.t. u_A = u¯_A ## Footnote Where ω_A = (2, 1) is the initial endowment for consumer A.

Question 28

What are Lagrange multipliers used for in finding the contract curve?

Answer 28

To set up the Lagrangian for constrained optimization ## Footnote Lagrange multipliers help find the maximum or minimum of a function subject to constraints.

Question 29

What do the first order conditions (FOCs) represent in the context of the contract curve?

Answer 29

They represent the conditions for maximizing utility under constraints; but we only care abou the FOCs st the four variables ## Footnote FOCs help determine the optimal consumption bundles for each consumer.

Question 30

What must be true about the marginal rate of substitution (MRS) at Pareto efficient allocations?

Answer 30

The MRS of the two consumers must be equal ## Footnote This means the indifference curves of the consumers are tangent to each other.

Question 31

Fill in the blank: The core is the set of all ______ that are welfare improving for both consumers compared to their initial endowment.

Answer 31

Pareto optimal allocations ## Footnote The core contains allocations that make at least one individual better off without making anyone else worse off.

Question 32

True or False: Jane and Denise should trade if both are maximizing their utility.

Answer 32

True ## Footnote Trading allows them to reach a more preferred bundle on the contract curve.

Question 33

What is the relationship between Jane's MRS and Denise's MRS at point f on the contract curve?

Answer 33

They are equal ## Footnote This equality indicates that no further mutually beneficial trade can occur.

Question 34

What does the area B represent in the context of Jane and Denise's preferences?

Answer 34

The more preferred bundles of both consumers ## Footnote This area indicates potential trades that could improve their utility.

Question 35

What is the significance of the initial endowment in the context of the core?

Answer 35

It serves as the starting point from which welfare improvements are measured ## Footnote Allocations in the core must improve welfare relative to these initial endowments.