Coursenotes_ECON301

Coursenotes_ECON301

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Unformatted text preview: when we used Y as the numeraire good, we had PX = 3/5, PY = 1. Recall, when we used normalization, we had PX = 3/8, PY = 5/8. These are the same things! To see this consider the price ratio _ PX__ in each of PY the three situations. [1] When we used X as the numeraire good, we had PX = 1, PY = 5/3 so... _ PX__ = __1__ = 3/5 5/3 PY [2] When we used Y as the numeraire good, we had PX = 3/5, PY = 1 so... _ PX__ = 3/5 PY 106 [3] When we used normalization, we had PX = 3/8, PY = 5/8 so... _ PX__ = 3/8 = 3/5 PY 5/8 The point is that in general equilibrium theory the actual prices themselves do not matter, only the ratio of the prices matter. As we discussed before, nominal variables may change in value depending upon which set of prices we use (i.e. numeraires or normalized) but the real variables will not change in value and the nominal variables are not usually the variables that are of central interest to us anyway. 107 HOMEWORK 1. Calculate all of the possible relative and normalized prices for the following price vector (and fill on the chart below with your answers): (PX , PY , r , w) = (7 , 9 , 23 , 18) Good / Factor Selected to be the Numeraire GOOD X GOOD Y CAPITAL LABOUR GOOD X PX = 7 GOOD Y PY = 9 CAPITAL LABOUR r = 23 w = 18 2. A price simplex of dimension 1 is a set of all non-negative price vectors (PX , PY) that sum to one, S = {(PX , PY) 0 | PX + PY = 1} What does this price simplex look like in a two dimensional diagram? 3. Ross, Phoebe, Joey, Monica, Rachel, and Chandler have the following individual demands for cappuccino, C: CRoss = CRoss(PC , MRoss) = MRoss / (2 PC) CPhoebe = CPhoebe(PC , MPhoebe) = MPhoebe / (7 PC) CJoey = CJoey(PC , MJoey) = 5MJoey / (14 PC) CMonica = CMonica(PC , MMonica) = 9MMonica / (28 PC) CRachel = CRachel(PC , MRachel) = 10MRachel / ( 21PC) CChandler = CChandler(PC , MChandler) = 21MChandler / (56 PC) Using horizontal summation, find the market demand for cappuccino if these 6 "friends" are the only consumers in the cappuccino market. Also, draw a diagram representing the horizontal summation that you performed (n...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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