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disc12 - DISCUSSION SECTION 12 Partial Equilibrium Model of...

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DISCUSSION SECTION 12 Partial Equilibrium: Model of choice: We know preferences U(x 1 ,x 2 ) and prices p 1 , p 2 , w 1 , w 2 and we find demands x 1 *, x 2 *. Where are prices formed? Are markets efficient? ------------------------------------------------------------------------------------------------------------------------------- General Equilibrium Two consumers (A and B) Two goods (endowments are given) What are the equilibrium prices and what is the equilibrium allocation (Warlrasian equilibrium)? What are the efficient allocations (Pareto efficiency)? Is the competitive equilibrium Pareto Efficient? (First Welfare Theorem) Are the Pareto efficient allocations equilibrium allocations? (Second Welfare Theorem) Geometric Representation: Edgeworth Box Mathematically: Set MRS A = MRS B and use this with the feasibility constraints: x 1 A + x 1 B = , x 2 A + x 2 B = . 1 ω 2 ω ------------------------------------------------------------------------------------------------------------------------------- An allocation is Pareto efficient if there is no way to make someone better off without making someone else worse off. The contract curve is the set of all Pareto-optimal allocations.
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