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Microeconomics Corso E

Microeconomics Corso E. John Hey. 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. Chapter 8.

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Microeconomics Corso E

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  1. MicroeconomicsCorso E John Hey

  2. 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.

  3. 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.

  4. 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.

  5. The initial allocation

  6. 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.

  7. Initial allocations

  8. The Competitive Equilibrium

  9. The Competitive Equilibrium

  10. 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.

  11. 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.

  12. Chapter 8 • The competitive equilibrium depends on the preferences and the endowments.

  13. Chapter 8 • Goodbye!

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