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Unformatted text preview: Part IIa: Paper 1 General Equilibrium and Welfare Economics Dr Sönje 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? StolperSamuelson Result • Heffernan & Sinclair, Chapter 2 • Krugman & Obstfeld, Chapters 3,4 3 Solving General Equilibrium Models Consumer: Robinson Crusoe Model ( 29 ( 29 π + = + = 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 = = π 4 Solution Steps (1) Solve consumer’s problem taking prices and wages as given (2) Solve producer’s 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 consumer’s problem ( 29 ] [ ln ln max , pc z H w z c L z c + + + = π λ p c c λ = 1 : Firstorder conditions w z z λ = 1 : p w z c = p wH c w wH z 2 2 * * + = + = π π Into budget constraint 6 (2) Solving producer’s problem wl pl l = 5 . max π 2 1 5 . = w pl Firstorder condition 2 2 * 4 w p l = p w l 2 5 ....
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 Spring '10
 Cowell
 Economics, Pricing, Supply And Demand, Price point, Austrian School

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