Bets against the lakers must be paid when they win

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Unformatted text preview: models: – Fire insurance pays if there is a fire. – Bets against the Lakers must be paid when they win. Lecture 17 Lecture 17 Plan for the Rest of the Lecture • Contingent commodities are goods that are delivered depending upon the state of the world. Lecture 17 2 5 – Walras’ exchange economy with many markets but no production. – An economy with two production goods and two factors of production. Lecture 17 Econ 11--Spring 2001 6 1 Prof. Jay Bhattacharya Econ 11--Spring 2001 Market Demand in Walras’ Economy Walras’ Exchange Economy • Each person picks his optimal consumption bundle to maximize utility • This leads to n individual demand functions for each individual which are a function of all market prices. – D1k(P1…Pn), D2k(P1…Pn),… Dnk(P1…Pn) • The sum of individual demand functions yields n market demand functions: – D1(P1…Pn), D2(P1…Pn),… Dn(P1…Pn) • n goods (x1…xn) in fixed supply, S1…Sn. • Each good has an associated price, P1…Pn. • There are K people and each take prices as given. • “Income” is the value of each person’s holdings at market prices n – Person k’s income is I k = ∑ Pi S ik i =1 – Person k’s budget constraint is: Lecture 17 Econ 11...
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