12 - Production - Nonexistence of Equilibrium Good 2 Good 1...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Nonexistence of Equilibrium Good 2 Good 1 ω _ In a 1-agent economy, equilibrium requires C * = ω _ Consumer with nonconvex preferences but endowed with both goods would want to consume only one of them: C * ≠ω for any P 1 / P 2 . If nonconvex preferences, possibly no equilibrium: ± Agent works to produce consumption goods: ± Each consumer can produce two goods ± Consumer allocates fixed number of hours between production of the two goods Production ± Labor allocation determines point on PPF ± View individual’s PPF as a set of alternative endowments ± The Marginal Rate of Transformation (MRT) tells us how much of good 2 we obtain by giving up one unit of good 1 good 1 good 2 1 |Slope| of PPF = MRT ± Case 1 (production inefficiency): ± When an interior point is chosen in the aggregate production set ± Case 2 (distribution inefficiency): ± When goods are distributed inappropriately ± Case 3 (allocative inefficiency): ± When the wrong mix of goods on aggregate PPF is produced 3 Cases When Every Consumer Can be Made Better Off
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 Productive Efficiency ± Aggregate Production can only be improved if MRTs are different!
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 5

12 - Production - Nonexistence of Equilibrium Good 2 Good 1...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online