Ami Pro - LN032811

Ami Pro - LN032811 - Economics 113 Prof. R. Starr Spring...

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Lecture Notes, March 28, 2011 General Equilibrium Theory Market-clearing prices and allocation of several goods, taking into account cross-market interactions. Existence of Equilibrium (Pareto) Efficiency of Allocation Decentralization of decision-making The Edgeworth Box 2 person, 2 good, pure exchange economy Fixed positive quantities of X and Y, and two households, 1 and 2. Household 1 is endowed with of good X and of good Y, utility function X 1 Y 1 U 1 (X 1 , Y 1 ) . Household 2 is endowed with of good X and of good Y, utility X 2 Y 2 function U 2 (X 2 , Y 2 ) X 1 + X 2 = X 1 X 2 X Y 1 + Y 2 = . Y 1 Y 2 Y Each point in the Edgeworth box represents an attainable choice of X 1 and X 2 , Y 1 and Y 2 . 1's origin is at the southwest corner; 1's consumption increases as the allocation point moves in a northeast direction; 2's increases as the allocation point moves in a southwest direction. Superimpose indifference curves on the Edgeworth Box. Competitive Equilibrium (p o x , p o y ) so that (X o1 , Y o1 ) maximizes U 1 (X 1 , Y 1 ) subject to (p o x , p o y )(X 1 , Y 1 ) (p o x , p o y ) and  X 1 , Y 1 (X o2 , Y o2 ) maximizes U 2 (X 2 , Y 2 ) subject to (p o x , p o y 1 , Y 1 p o x , p o y ) , and
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Ami Pro - LN032811 - Economics 113 Prof. R. Starr Spring...

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