2010 slides_ge - 1 General Equilibrium 2 types of agents in...

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1 General Equilibrium ° 2 types of agents in a pure exchange economy: Edge- worth box. ° Equal numbers of 2 type of agents: Jack and Mary. ° 2 goods, apples and oranges. Jack has A j and O j apples and oranges respectively. ° Mary has A m and O m respectively. ° Positive analysis: How do they trade? How are rela- tive prices are determined in a competitive market? ° Normative analysis: What kind welfare properties does a competitive equilibrium have?
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° In an Edgeworth box, the horizontal length is the sum of Jack°s and Mary°s endowments of apples. The vertical length is the sum of Jack°s and Mary°s endowments of oranges. ° All allocations within an Edgeworth box is an allo- cation of resources between Jack and Mary. Jack°s allocations start from the origin {0,0}. So if we con- sider the allocation f A; O g . Then we say Jack gets A apples and O oranges. ° Mary°s allocation is the remainder: A j + A m ± A apples and O j + O m ± O oranges. Mary°s origin is at the North East corner of the Edgeworth Box. ° Jack has standard indi/erence curves for apples and oranges. His utility increases as the allocation moves to the North East.
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Jack’ s origin Mary’ s origin A j O J O m A m E F G U j 0 U m 0 U j 1 U m 1
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