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Unformatted text preview: sider a pure exchange economy with three goods,(X, Y, and Z), and two consumers, A and B. UA = X1/2Y1/4Z1/4 A = (XA , YA, ZA) = (1,1,1) UB = X1/4Y1/2Z1/4 B = (XB , YB, YB) = (1,1,1) Solve for the general equilibrium price ratios, and report the equilibrium quantities demanded for each consumer. 128 ECON 301 LECTURE #8 PRODUCTION ECONOMY The production economy introduces, you guessed it, production into the pure exchange general equilibrium model. This analysis is considerably more complicated than the pure exchange model without production since now we must trace the interaction between consumers and producers in both the goods markets and the factor markets. So now we have two goods, X and Y, two factors, K and L, and two consumers, A and B. The consumers play the dual role of buyers in the goods markets and sellers in the factor markets while the opposite is true for the producers. Using this simple structure, we will be able to trace the inter-relationship between three basic components of the economy: consumers, producers and markets. Here are the details: Commodities Prices Buyers Sellers Good X PX Consumer A Consumer B Producer X Good Y PY Consumer A Consumer B Producer Y Capital (K) r Producer X Producer Y Consumer A Consumer B Labour (L) w Producer X Producer Y Consumer A Consumer B In this case, we are using the terminology of "producer" to mean a firm, industry, or a sector. Additionally, we will assume that each producer produces only one good at a time (i.e. producer X produces good X while producer Y produces good Y). That is, we will not consider the very complex case of joint production where all producers can make several different types of products. We will approach the distribution of endowments differently in this model as well. Unlike the pure exchange model which has initial endowments defined in terms of goods, the production economy takes a step back and defines the initial endowment distribution in terms of factors as follows: Consumer A Consumer B Total Capital (K) KA KB KT Labour (L) LA LB LT where KA , KA denote the...
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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.
- Spring '10