GWLecture5

GWLecture5 - Part IIa: Paper 1 General Equilibrium and...

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Unformatted text preview: Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Snje Reiche 2 Outline: Trade and Production Solving GE Models Competitive equilibrium in production: deriving PPF What happens to factor prices when the price of a final good changes? Stolper-Samuelson Result Heffernan & Sinclair, Chapter 2 Krugman & Obstfeld, Chapters 3,4 3 Solving General Equilibrium Models Consumer: Robinson Crusoe Model ( 29 ( 29 +- = + = z H w pc t s z c z c u z c . ln ln , max , Producer: ( 29 ( 29 5 . max l l f where wl l pf l =- = 4 Solution Steps (1) Solve consumers problem taking prices and wages as given (2) Solve producers problem taking prices and wages as given (3) Find excess demand functions for c and for z (4) Verify that Walras Law holds (5) Set excess demand equal to zero and solve for equilibrium price (6) Check for uniqueness and stability 5 (1) Solving consumers problem ( 29 ] [ ln ln max , pc z H w z c L z c- +- + + = p c c = 1 : First-order conditions w z z = 1 : p w z c = p wH c w wH z 2 2 * * + = + = Into budget constraint 6 (2) Solving producers problem wl pl l- = 5 . max 2 1 5 . =-- w pl First-order condition 2 2 * 4 w p l = p w l 2 5 ....
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GWLecture5 - Part IIa: Paper 1 General Equilibrium and...

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