Final Review

Final Review - Final Review Partial Equilibrium Taxing o...

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Final Review Partial Equilibrium Taxing o Both sides generally incur the tax UNLESS… o Perfectly elastic supply : tax fully paid by consumers o Perfectly inelastic supply: tax fully paid by producers General Equilibrium: An Exchange Economy (Ch. 31) Determining the allocation of fixed quantities of goods amongst agents Only relative prices are determined in general equilibrium system Edgeworth boxes o Agent A: willing to trade to any bundle that makes him better off: up and to the right o Agent B: willing to trade to any bundle that makes him better off: down and to the left o Agents will trade until they arrive at a point where there are no more gains to be made- indifference curves are tangent o Allocation ultimately depends on who is the bargaining power (ex: Monopoly, costs of waiting) o Market Equilibrium: prices are such that there is no excess supply or demand in either market Budget line goes through endowment and intersection of price offer curves Indifference curves are tangent to each other o First Fundamental Theorem of Welfare Economics All market equilibria are Pareto Efficient Says nothing about the distribution of economic benefits Market equilibrium might not be a “just” allocation o Second Fundamental Theorem of Welfare Economics When preferences are convex, a Pareto efficient allocation is an equilibrium for some set of prices Price plays two roles 1) Allocative: indicate relative scarcity 2) Distributive: determine how much of different goods different agents can purchase 2 nd Theorem says that these two roles can be separated Production Production functions o Decreasing returns to scale o Constant returns to scale o Increasing returns to scale Production Possibility Sets (PPS)
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o Slope= Marginal rate of transformation, MRT o Production possibility frontier (PPF): border of PPS Individual Choice o Optimum: MRS=MRT Budget sets : See diagram o To maximize budget set, MRT=-p1/p2 Same as maximizing profit o Market value of a chosen endowment point is: v(c,l) = p c c +p l l o Iso-profit lines : market value of endowment points are constant p c c +p l l = k Production decision o Optimum production: MRT=p1/p2
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This note was uploaded on 05/01/2008 for the course ECON 101 taught by Professor Jack during the Spring '08 term at Georgetown.

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Final Review - Final Review Partial Equilibrium Taxing o...

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