PS11+exercise+solutions

# PS11+exercise+solutions - Intermediate Microeconomics 2010...

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Intermediate Microeconomics, 2010 Problem Set 11: Exercise Solutions In this topic we combine what we have learned about supply with what we have learned about demand in order to start discussing the properties of competitive equi- libria. In order to do so, we introduce a simple economy: the quasilinear economy. A quasilinear economy is an economy in which all consumers have quasilinear utility functions. As we will demonstrate in these exercises, quasilinear utility functions are relatively simple to work with because they remove any income e ects from our analyses. In order to simplify matters further, we allow for m to be negative. This assumption allows us to nd that demand is determined by P D ( q ) = v 0 ( q ). As usual, supply is determined by the rm’s marginal costs: P S ( q ) = c 0 ( q ). In this topic, we learn how to nd a competitive allocation in a quasilinear economy. A competitive allocation is characterized by p which satis es three properties: 1. Demand = Supply : P S ( q ) = P D ( q ) = p determines the equilibrium quantity sold and bought and the equilibrium price. 2. The consumer wastes no money : m = Y p q determines the amount of money left over for the consumer.

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