PAM200Lecture18 - PAM 200 Lecture 18 Do note sit in last 4...

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    PAM 200 Lecture 18 Do note sit in last 4 rows! Agenda Welfare Theorems Production in General Equilibirum Gains from Trade Monopoly MR for Monopolist
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    The Role of Prices (con’t) prices must change in order to clear the  market (think of an auctioneer calling  out various prices) Price line will change  At the equilibrium point, MRS S  = P l /P A  =  MRS B This will be true for all  n  consumers in a  general equilibrium
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    First Welfare Theorem of  Economics Where this occurs, its called a  competitive equilibrium This illustrates the first welfare theorem  of economics:  Any competitive  equilibrium is Pareto efficient  
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    First Welfare Theorem of  Economics (con’t) Since the marginal rates of substitution  are equal, then the competitive  equilibrium must lie on the contract  curve (i.e. is Pareto efficient)
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    Second Welfare Theorem of  Economics Suppose government wants to achieve a  certain outcome (distribution of goods) Can it be achieved using trading among  consumers (“competition”), given an  appropriate initial endowment? If the endowment is any initial allocation along  the price line, then parties will trade to the  same point
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    Second Welfare Theorem of  Economics (con’t) The allocation can be obtained as a  competitive equilibrium if the allocation  lies along the price line Illustrates second welfare theorem: Any Pareto-efficient equilibrium can be  obtained by competition, given an  appropriate endowment
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     Production in General  Equilibrium Suppose that Sue and Bob can use 
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PAM200Lecture18 - PAM 200 Lecture 18 Do note sit in last 4...

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