class14-2 post B_W

class14-2 post B_W - lass 4 Class 14 Tips Problem Set 11...

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Unformatted text preview: lass 4 Class 14 Tips Problem Set 11 Problem Set 12 Outline areto Efficiency Pareto Efficiency Trading Mechanism Dictator Bargaining arket Market Walrass Law First Welfare Theorem Second Welfare Theorem Trade and Pareto Efficiency enise q Fundamentals: - Goods ndowments Denise J2 q D1 e- Endowments- Preferences Allocation: q =(q J1 , q J2 , q D1 , q D2 ) Jane: q J = (q J1 , q J2 ) Jane q J1 q D2 Denise: q D = (q D1 , q D 2 ) easible An allocation feasible if Feasible : An allocation q is feasible if q J1 + q D1 = e J1 + e D1 = e 1 q e e q J2 + q D2 = e J1 + e D1 =e 2 Trade and Pareto Efficiency enise q Denise J2 q D1 Starting at initial endowment e Trade to A is mutually beneficial Trade to B is mutually beneficial A e At B : No more mutually beneficial trade is possible areto Efficient B ne q J1 B is Pareto Efficient ! Pareto Efficiency : An allocation q is Pareto Efficient if there is no feasible allocation q , t Jane q D2 s. t. q J q J and q D q D D ; J ; or q D q D and q J q J J ; D ; Trade and Pareto Efficiency Observation: If q is an interior Pareto Efficient allocation, then: RS = MRS MRS J MRS D If MRS J MRS D , mutually beneficial trade is possible I J I D MRS J =MRS D Pareto Efficiency and Trade t t Contract Curve Contract Curve : Set of Pareto efficient allocations Idea: If a trading contract is final, it should be Pareto I J e efficient. Otherwise, traders would both be better off renegotiating. I D Individually Rational & I J I D Individually rational : An allocation q is dividually rational if I J I D Pareto Efficient individually rational if q J e J and q D e D D ; J ; Outline areto Efficiency...
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class14-2 post B_W - lass 4 Class 14 Tips Problem Set 11...

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