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General%20Equilibrium - Economics 302 Salim Rashid 1 Why...

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Economics 3 02 for all inputs and firms MRTSF=MRTSG for consumption and production MRS = MRT Contrast between Planning and Market approaches A. Planning: Assume a beneficent dictator who is omnipotent and omniscient. What approach would he use? Answer: Find the Pareto-Optimal (Efficient) frontier of the Utility Possibility Set. This frontier is also traced out by maximising A's utility while keeping B's utility fixed. 2. Two Fundamental Theorems of Welfare Economics First Theorem: Every Competitive Equilibrium is Pareto-efficient. Second Theorem: With convexity, every Pareto-efficient point can be enacted as a competitive equilibrium. 3. 4 . Marginal conditions for Pareto-efficiency (optimality) MRSA = MRSB for all pairs of good and individuals. Salim Rashid 1. 5 - 6 . Why General Equilibrium? A. Partial Equilibrium ignores interactions, especially price and income effects. In Macroeconomics, effects of a capital tax. In C-B Analysis, effects of a dam, or railroads, etc.cumulative or
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