question

When is production efficient?

answer

When no more output is possible at a given cost

question

When is consumption efficient?

answer

When goods cannot be allocated so that at least one person is better off without harming someone else

question

When is equilibrium equitable?

answer

It depends on value judgments

question

Pareto Efficiency

answer

An allocation where any reallocation would harm at least one person

question

Partial Equilibrium Conditions

answer

- 1 market

- the prices and quantities of other goods are fixed

- the prices and quantities of other goods are fixed

question

General Equilibrium Conditions

answer

- 2 markets

- the prices and quantities of other goods affect the price and quantity of other goods

- the prices and quantities of other goods affect the price and quantity of other goods

question

Endowment

answer

- An initial allotment of goods

- Serves as the basis for income

- Serves as the basis for income

question

Income Formula

answer

Y = p1q1 + p2q2

question

Edgeworth Box

answer

A graph that illustrates trade between two people with fixed endowments

question

Contract Curve

answer

- A curve that contains all points where allocations are pareto efficient

- Indifference curves are tangent on this curve

- Indifference curves are tangent on this curve

question

Deriving the Contract Curve with Calculus

answer

Max L = U1(A1,B1) + λ[U2(A2,B2) - u2]

or

Max L = U1(A1,B1) + λ[U2(A-A1)(B-B1) - u2]

or

Max L = U1(A1,B1) + λ[U2(A-A1)(B-B1) - u2]

question

Deriving the Contract Curve with Algebra

answer

MRS1 = MRS2

question

Are allocations where one person owns everything pareto efficient?

answer

yes, because a different allocation would hurt the person with everything

question

What is the value of a good in competitive equilibrium?

answer

relative price

p1/p2

p1/p2

question

Price Line definition

answer

All combinations of goods you can get through trade, given endowments

question

Price Line formula

answer

-px/py

question

Solving for P and Q in general equilibrium

answer

- Add demands together for D

- Set D = S

- Set D = S

question

Cobb-Douglas Demand formula

answer

Q1 = aY/(a+b)px

Q2 = bY/(a+b)py

Q2 = bY/(a+b)py

question

Perfect Substitutes Demand formula

answer

- Choose the good with the lower price, relative to utility

- Q = Y/p

- Q = Y/p

question

Perfect Complements Demand formula

answer

- Min U = (xA,yB)

- Set xA = yB, so x = yB/A and y = xA/B

- Plug the values into the budget constraint

- Solve for x and y

- Set xA = yB, so x = yB/A and y = xA/B

- Plug the values into the budget constraint

- Solve for x and y

question

For perfect substitutes, when will you choose Qx

answer

When:

Px/Py < MUx/MUy

Px/Py < MUx/MUy

question

Demand Elasticity generic formula

answer

(dQ/dP)(P/Q)

question

Demand Elasticity identity

answer

-bP/Q,

where Q = a - bP

where Q = a - bP