MGT 621 – Microeconomics
8. General Equilibrium
Lecture Notes (Overheads Used In Class)
· Pindyck/Rubinfeld, Ch. 16
· Draw an Edgworth-Bowley box diagram (“Edgeworth box”) for an exchange economy with two consumers and two goods (apples and bananas), where consumer 1 has an endowment vector (300,100) and consumer 2 has an endowment vector (100,200), and both have convex preferences.
· In this economy, explain what constitutes “wealth” and why it is endogenously determined.
· What happens if all prices are multiplied by a factor of 10? What is a numéraire good?
· Sketch the contract curve in the Edgeworth box, as well as the “core” of the economy.
· Explain why the contract curve (“Pareto set”) contains all Pareto-optimal allocations of the economy.
· How could the Pareto set be computed, given utility functions for the two agents?
· Define a Walrasian equilibrium in the exchange economy.
· Are the gains from trade realized in a Walrasian equilibrium?
· How can a lump-sum transfer be used to implement a different point on the contract curve?
Background Reading (for future reference only)
· Arrow, K.J., Hahn, F.H. (1971) General Competitive Analysis, Oliver and Boyd, Edinburgh, UK.
· Debreu, G. (1959) Theory of Value: An Axiomatic Analysis of Economic Equilibrium, Yale University Press, New Haven, CT; Chs. 5—6.
· Mas-Collel, A. (1985) The Theory of General Economic Equilibrium: A Differentiable Approach, Cambridge University Press, Cambridge, UK.
· McKenzie, L.W. (2002) Classical General Equilibrium Theory, MIT Press, Cambridge, MA.