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lecture14

# lecture14 - Professor Jay Bhattacharya Spring 2001 Preview...

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Professor Jay Bhattacharya Spring 2001 Econ 11--Lecture 14 1 Spring 2001 Econ 11--Lecture 14 1 Preview of Rest of the Course • We have covered consumer decision making and firm decision making. • One more lecture on decision making under uncertainty—next Tuesday. • The rest of the lectures will focus on how consumers and firms interact in a market. – The emphasis will be on whether market outcomes are “good.” Spring 2001 Econ 11--Lecture 14 2 Voluntary Trade is Good for Both Parties • Consider an economy consisting of two people (A andB)withwellbehavedpreferencesandtwo goods (x and y). • Suppose A starts with x a =100andy a =1 • Suppose B starts with x b =1andy b = 100. • With well behaved preferences, averages are preferred to extremes. • Some trades that involve A giving up to 99 x in exchange for up to 99 y (at a rate of one for one) will leave both A and B better off. Spring 2001 Econ 11--Lecture 14 3 Trade is good Person A Person B x y x y Spring 2001 Econ 11--Lecture 14 4 Sometimes Trade is Not Wanted Person A Person B x y x y A’s endowment point is also the tangency point of 1 for 1 trading ratio B would like to trade, but at the 1 for 1 exchange, A does not want to trade. Spring 2001 Econ 11--Lecture 14 5 Edgeworth Box (0,0) B (0,0) A Endowment point (101,0) y a y b x a x b (0,101) (101,0) (0,101) For B: (1,100) For A: (100,1) Spring 2001 Econ 11--Lecture 14 6 A’s Utility in Edgeworth Box (0,0) B (0,0) A (101,0) y a y b x a x b (0,101) (101,0) (0,101) U a Increasing Utility

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Professor Jay Bhattacharya Spring 2001 Econ 11--Lecture 14 2 Spring 2001 Econ 11--Lecture 14 7 B’s Utility in Edgeworth Box (0,0) B (0,0) A (101,0) y a y b x a x b (0,101) (101,0) (0,101) U b Increasing Utility Spring 2001 Econ 11--Lecture 14 8 Trading Region (0,0) B (0,0) A (101,0) y a y b x a x b (0,101) (101,0) (0,101) U a U b Any trade between the utility curves increases both A’s and B’s utility Spring 2001 Econ 11--Lecture 14 9 Trading Region Vanishes When MRS A =MRS B (0,0) B (0,0) A (101,0) y a y b x a x b (0,101) (101,0) (0,101) U a U b AandBwill trade up to the point where MRS A =MRS B Spring 2001 Econ 11--Lecture 14 10 If MRS A MRS B then Mutually Beneficial Trades Still Exist • Consider an allocation of x and y where MRS A (x for y) > MRS
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lecture14 - Professor Jay Bhattacharya Spring 2001 Preview...

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