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
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