This preview shows pages 1–3. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: University of Minnesota Department of Economics Econ 3102: Intermediate Macroeconomics Handout 3 This handout presents how we can use all the results obtained in handouts 1 and 2 in order to characterize our competitive equilibrium. Well do this in two different routes: following the definition of a competitive equilibrium, and then using the social planners equivalence. 1 Competitive equilibrium In class we gave the following definition: Definition 1.1. A competitive equilibrium is a set of ( C,N s ,N d ,T,Y,w ) such that given ( G,z,K ): 1. The representative consumer chooses C, to solve max C, U ( C, ) subject to C = w ( h ) +  T C h, here N s = h . 2. The representative firm chooses N d to solve max N d zF ( K,N d ) wN d subject to N d , where Y = zF ( K,N d ), = Y wN d = zF ( K,N d ) wN d . 3. All markets clear: N d = N s . 4. The governments budget constraint is satisfied: G = T. 1 2 Characterizing the competitive equilibrium To characterize the competitive equilibrium, note that from the consumers problem we get: U ( C, ) wU C ( C, ) = 0 (2.1) wN s +  T C = 0 . (2.2) From the firms problem we get zF N ( K,N d ) = w, (2.3) and finally, we need the market clearing condition, plus the government budget constraint: N d = N s (2.4) G = T. (2.5) Now lets try to simplify (2.1) (2.5). From (2.4), let N d = N s = N , and substitute in (2.2), (2.3). Then we get: wN +  T C = 0...
View
Full
Document
This note was uploaded on 02/07/2011 for the course ECON 3102 taught by Professor Mingyi during the Spring '08 term at Minnesota.
 Spring '08
 MINGYI
 Macroeconomics

Click to edit the document details