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Unformatted text preview: Lecture 15 1minute review competitive economy goods consumers: endowments + utility functions producers: production functions competitive equilibrium prices for all goods consumption choices for all consumers production plans for all producers such that consumers maximize in budget sets producers maximize profits markets clear Assume: production is constant returns to scale firms make zero profits 1 Example: Robinson Crusoe Economy Version 1 2 goods: coconuts c and labor ` 1 consumer: u ( c,` ) = c 1 / 2 ` 1 / 2 , e = (0 , 1) production function c = A` ( A is a parameter) What happens if A increases? Equilibrium variables prices: p c ,p ` consumption choice: c * ,` * production plan: ` in ,c out We have 6 variables, we will get 6 equations (1 redundant) consumer optimizing (2) profit maximizing (2) market clearing (2) 2 c * = (1 / 2)( p ` 1) p c (1) ` * = (1 / 2)( p ` 1) p ` (2) c out = A` in (3) p c c out = p ` ` in (4) c * = c out (5) ` * + ` in = 1 (6) These are easy to solve: p ` p c = A ` in = 1 / 2 c out = (1 / 2) A c * = (1 / 2) A ` * = 1 / 2 u ( c * ,` * ) = (1 / 2) A 1 / 2 3 What happens as A ? wage rate c * ` * constant u ( c * ,` * ) 4 Example: Robinson Crusoe Economy Version 2 2 goods: coconuts c...
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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
 McDevitt
 Utility

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