GE_exchange_CH10

# GE_exchange_CH10 - 1 General Equilibrium Exchange Economy 2...

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Unformatted text preview: 1 General Equilibrium: Exchange Economy 2 Exchange  Two consumers, A and B.  Their endowments of goods 1 and 2 are  E.g.  The total quantities available    A A A  ( , ) 1 2    B B B  ( , ). 1 2 and  A  ( , ) 6 4  B  ( , ). 2 2 and   1 1 6 2 8 A B       2 2 4 2 6 A B     units of good 1 units of good 2. and are 3 Exchange  Edgeworth and Bowley devised a diagram, called an Edgeworth box , to show all possible allocations of the available quantities of goods 1 and 2 between the two consumers. 2 4 Starting an Edgeworth Box 5 Starting an Edgeworth Box Width =   1 1 6 2 8 A B     6 Starting an Edgeworth Box Width =   1 1 6 2 8 A B     Height =   2 2 4 2 6 A B     3 7 Starting an Edgeworth Box Width =   1 1 6 2 8 A B     Height =   2 2 4 2 6 A B     The dimensions of the box are the quantities available of the goods. 8 Feasible Allocations  What allocations of the 8 units of good 1 and the 6 units of good 2 are feasible?  How can all of the feasible allocations be depicted by the Edgeworth box diagram? 9 Feasible Allocations  What allocations of the 8 units of good 1 and the 6 units of good 2 are feasible?  How can all of the feasible allocations be depicted by the Edgeworth box diagram?  One feasible allocation is the before- trade allocation; i.e. the endowment allocation . 4 10 Width =   1 1 6 2 8 A B     Height =   2 2 4 2 6 A B     The endowment allocation is  A  ( , ) 6 4  B  ( , ). 2 2 and The Endowment Allocation 11 Width =   1 1 6 2 8 A B     Height =   2 2 4 2 6 A B      A  ( , ) 6 4  B  ( , ) 2 2 The Endowment Allocation 12  A  ( , ) 6 4 O A O B 6 8  B  ( , ) 2 2 The Endowment Allocation 5 13  A  ( , ) 6 4 O A O B 6 8 4 6 The Endowment Allocation 14  B  ( , ) 2 2 O A O B 6 8 4 6 2 2 The Endowment Allocation 15  A  ( , ) 6 4  B  ( , ) 2 2 O A O B 6 8 4 6 2 2 The endowment allocation The Endowment Allocation 6 16 More generally, … The Endowment Allocation 17 The Endowment Allocation O A O B The endowment allocation   1 1 A B   2 A   2 2 A B   1 A  1 B  2 B 18 Other Feasible Allocations  denotes an allocation to consumer A.  denotes an allocation to consumer B.  An allocation is feasible if and only if ( , ) x x A A 1 2 ( , ) x x B B 1 2 x x A B A B 1 1 1 1      x x A B A B 2 2 2 2      . and 7 19 Feasible Reallocations O A O B   1 1 A B  x A 2   2 2 A B  x A 1 x B 1 x B 2 20 Feasible Reallocations O A O B   1 1 A B  x A 2   2 2 A B  x A 1 x B 1 x B 2 21 Feasible Reallocations  All points in the box, including the boundary, represent feasible allocations of the combined endowments. 8 22 Feasible Reallocations ...
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GE_exchange_CH10 - 1 General Equilibrium Exchange Economy 2...

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