Chapter
2
, Exercises 2.1, 2.2, 2.3.
2.1.
General equilibrium consists of a wage rate w so that supply and demand are equated in
each of the active markets, oysters and labor/leisure.
Household behavior is described as
choosing c, R to maximize u(c, R) subject to (2.29, 2.30) for given w and
(treated
parametrically).
The first order condition is equation (2.19) of the text.
u
R
w
u
c
.
Firm behavior is described as choosing L and q to maximize
given w (treated parametrically).
The first order condition is (2.14) in the text, F'(L) = w.
w
achieves a general equilibrium
when these separate decisions are consistent with one another, that is, when
q = c , and
R + L = 168.
2.2.
(a)
Walras Law holds both in and out of equilibrium.
It reflects merely the budget
constraint and the inclusion of firm profits in household budgets, both of which occur both in and
out of equilibrium.
(b)
The household budget is defined in terms of projected firm profits, not in terms of
realized profits.
Hence the budget in this model is unaffected by the disequilibrium.
(c)
Starting from an excess demand for labor/leisure, we would expect the wage rate to
increase.
2.3.
(a)
The first order conditions for the solution to 2.3(a) are characterized in equation (2.7)
as
R
q
u
F
u
.
But this follows directly from (2.14) and (2.19) of problem 1.
Hence (with the
addition of second order conditions) the solutions are equivalent.
(b)
The result above in section (a) says that the solution of the general equilibrium and
the efficient allocation problem are the same.
Hence the general equilibrium solution is efficient.
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 Fall '08
 ZAMBRANO
 Microeconomics, Equilibrium, Supply And Demand, general equilibrium, Walras law

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