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Unformatted text preview: Lecture 13 1-minute review allocative efficiency Edgeworth Box 1 Exchange As an introduction to equilibrium we consider a simple situation: an exchange economy with no production. We first need to expand our description of consumers to include endowments what they come to the market with. We have already done this in the labor/leisure discussion, now we just allow consumers to come to the market with any/all of the commodities. Exchange: Example There are two goods, lets call them Daffodils and Roses D,R , two consumers Ann, Bill, with utility functions and endowments u A ( D,R ) = DR , e A = (100 , 0) u B ( D,R ) = DR 2 , e B = (0 , 200) Story: Ann grows Daffodils, Bill grows Roses, but both Ann &amp; Bill like mixtures of flowers. First sketch an Edgeworth Box. Now solve for the efficient allocations ( D A ,R A ) , ( D B ,R B ). We must have MRS A = MRS B D A + D B = total Daffodils R A + R B = total Roses Computing gives R A D A = R B 2 D B D A + D B = 100 R A + R B = 200 Substituting gives R A D A = 100- R A 2(200- D A ) 2 400...
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This note was uploaded on 04/01/2010 for the course ECON Econ 11 taught by Professor Mcdevitt during the Fall '07 term at UCLA.
- Fall '07