2BMidtermAnswerKey

2BMidtermAnswerKey - FORM Economics 113 UCSD Spring 2011...

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FORM Ω Economics 113 UCSD Spring 2011 Prof. R. Starr, Ms. Stephanie Fried Midterm Exam FORM Ω1 Form Ω Answer Key 1 Recall Theorem 18.1 Assume P.II–P.V, C.I–C.V, C.VI(SC), and C.VII. There is p P so that p is an equilibrium price vector. That is, Z ( p ) 0 and p k = 0 for k so that Z k ( p ) < 0 where p is described in the definition of question 2, below. The notion that the economy is competitive is embodied in the Arrow-Debru general equilib- rium model in the description of firms and households as ‘price-takers.’ That is, firms and households do not set prices and do not bargain to rearrange prices. This reflects the notion that they are sup- posed to be individually small relative to the size of the economy and hence lack sufficient market power to set prices themselves or to bargain effectively. In the definition below in question 2, and in the theorem 18.1 above, is it an assumption or a conclusion that firms and households are ‘competitive’ in this sense? If an assumption, where is it made? If a conclusion, what explicit assumptions is it based on?
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