Microeconomics Corso E

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MicroeconomicsCorso E

• John Hey

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This Week

• Tuesday with Daria
• Exercise 2 useful for the future.
• Later (I am asking for more time)
• Exercise 2b useful for this course (and the
  exams!)
• Wednesday Chapter 8 (the most beautiful and
  important of the course).
• Thursday Chapter 10.

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Chapter 8

• This chapter introduces the Edgeworth Box...
• ... the most important concept in the course.
• Used for studying exchange between two
  individuals.
• We look for an efficient exchange and we ask
  about fairness.

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Chapter 8

• We begin with a society of two individuals with
  Cobb-Douglas preferences over two goods Good 1
  and Good 2.
• Individual A with parameter a 0.7.
• Individual B with parameter a 0.6.
• Individual A has an endowment of 22 of Good 1 and
  of 92 of Good 2.
• Individual B has an endowment of 128 of Good 1
  and 8 of Good 2.

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The initial allocation
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Chapter 8

• The contract curve is...
• ... the locus of allocations efficient in the
  sense of Pareto.
• An allocation off the curve is inefficient.
• An allocation on the curve is efficient.

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Initial allocations
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The Competitive Equilibrium
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The Competitive Equilibrium
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Chapter 8

• The second scenario with different preferences
• Individual A with parameter a 0.7.
• Individual B with parameter a 0.3.
• Individual A has an endowment of 22 of Good 1 and
  92 of Good 2.
• Individual B has an endowment of 128 of Good 1
  and 8 of Good 2.

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Summary

• The contract curve shows the allocations that are
  efficient in the sense of Pareto.
• There always exist the possibility of mutually
  advantageous exchange if preferences are
  different and/or endowments are different.
• Price-taking behaviour is always Pareto
  efficient.
• If one of the individuals chooses the price the
  allocation is not Pareto efficient.
• Perfect competitive equilibrium (with both
  individuals taking the price as given) always
  leads to a Pareto efficient allocation.

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Chapter 8

• The competitive equilibrium depends on the
  preferences and the endowments.

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Chapter 8

• Goodbye!