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Unformatted text preview: FORM A FORM A FORM A FORM A FORM A FORM A 1 Please answer all questions. Each of the four questions marked with a big number counts equally. Designate your answers clearly. 1 In a general equilibrium model, when prices adjust so that markets clear (the general equilibrium prices are achieved) and the resulting allocation is Pareto efficient, the price system is said to decentralize the efficient allocation. What does decentral- ize mean in this statement? Suggested Answer: Typically in a general equilibrium model, there is strong interdependence among households and between households and firms. Households consume what firms produce. One households consumption of a good in limited supply depends on others not taking it for themselves. Nevertheless, in a general equilibrium, firms and households do not take others actions into account. They merely consult prevailing prices. This lack of specific co-ordination among firms, among households, and between firms and households is described as decentraliza- tion. Though each firms and households opportunities depend on others actions, they need not take them into account. They rely merely on prices to provide sufficient co-ordination....
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- Fall '08