Midterm 2

1
Midterm 2

• Review

2
Three parts (L9-L18)

• Applications of buying and selling
• Intertemporal Choice
• Uncertainty
• Markets and Exchange
• Pareto (In) efficiency
• Competitive equilibrium
• Producers
• Production function
• Profit Maximization
• Labor markets
• Cost Minimization (cost functions)

3
Uncertainty

• Two states, probabilities
• Bundle lottery
• Bernouli and Von Neumann-Morgenstern U.
• Examples

4
Risk Aversion

• Expected value of lottery
• Examples
• Risk aversion
• better than
• Utility and risk aversion

5
Utility and Risk Aversion
6
Certainty Equivalent

• Certainty equivalent of lottery
• Example
• Example
• Risk Aversion

7
Uncertainty Insurance

• Possibility of Flood
• Insurance contract
• Budget set

8
Uncertainty Insurance

• Choice

9
Markets and Exchange (key ideas)

• Edgeworth Box (apple-orange, IC, U)
• Competitive Equilibrium
• Pareto Efficiency
• Competitive Equilibrium Pareto efficient?
• Application apple-orange, IC, U

10
Edgeworth Box
11
Competitive Equilibrium
12
Competitive Equilibrium
13
Competitive Equilibrium (Geometry)
14
Competitive E and Pareto Efficiency