Suppose that we choose e1 at xa 025 and e2 at xa 050

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Unformatted text preview: a move from E1 to E2. Moreover, A can compensate B and still remains better off with a net gain of 0.009049 in CV. This welfare result is indeed misleading since it is contrary to the fact that we have pre-selected E1 and E2 to be equally optimal. Consumer A (better off) Consumer B (worse off) Total HOMEWORK [1] Re-calculate CV and EV for our example where a consumer with a square root utility function, income of $10 (M = 10), and unit prices (PX = PY = 1) but both PX and PY increase by 25% with everything else remaining the same. [2] Verify the welfare calculations for the Boadway's Paradox example above (i.e. solve the example and see if you can get the same results as are in the table provided above). CVA = -0.603037 CVB = 0.593988 CVsum = -0.009049 219 ECON 301 LECTURE #13 Liontief Input Output Models Recall that throughout the course we have discussed the perfect compliments production function. This functional form is often referred to as a fixed coefficients or fixed proportions function and was named after Professor Wassily Liontief and his seminal work from the early 1950s. In its "static" version, Liontief's input output2 analysis deals with the following question: What level of output should each of the n industries in an economy produce such that that output will be just enough to satisfy the total demand for that product? The reason for the term input output analysis now becomes quite clear. The output of any given industry (let's say the steel industry) is needed as an input in many other industries, or even as an input into its own industry; thus the correct level of steel output (i.e. shortage-free and surplus-free) will depend on the input requirements of all of the n industries in the economy. In turn, the output of many other industries will enter into the steel industry as inputs, and consequently the "correct levels of these other products will depend partly upon the input requirements of the steel industry. In light of this inter-industry dependence, any set of "correct" output levels for the n industries must be one that is consistent with all of the input require...
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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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