ECON 100 Tutorial 12

1. ECON 100Tutorial 12 Rob Pryce www.robpryce.co.uk/teaching

2. Question 1a

3. Question 1b, 1c, 1d If Athletic Country currently produces 100 bats and 400 rackets, what is the opportunity cost of an additional 100 bats? 40 rackets If Athletic Country currently produces 300 bats and 300 rackets, what is the opportunity cost of an additional 100 bats? 100 rackets Why does the additional production of 100 bats in part (c) cause a greater trade-off than the additional production of 100 bats in part (b)? As we produce more bats, the resources best suited for making bats are already being used. Therefore it takes even more resources to produce 100 bats and greater reductions in racket production… or Diminishing marginal product.

4. Question 1e, 1f 160 rackets 200 bats Is the production of 200 bats and 200 rackets efficient? NO – could produce more

5. Question 2a PRODUCTION EDGEWORTH BOX LBetty 0Betty KJohn C IQ1Y IQ2Y c IQ3Y IQ4Y b IQ3X a IQ2X IQ1X KBetty 0John LJohn

6. Question 2a EXCHANGE EDGEWORTH BOX AleB 0B BreadJ C IC12 IC22 c IC32 IC42 b IC31 a IC21 IC11 BreadB 0J AleJ

7. Question 2b State the marginal conditions required for efficiency

8. Question 2c PRODUCTION EDGEWORTH BOX LBetty 0Betty KJohn C IQ1Y IQ2Y c IQ3Y IQ4Y b IQ3X a IQ2X IQ1X KBetty 0John LJohn

9. Question 2c EXCHANGE EDGEWORTH BOX AleB 0B BreadJ C IC12 IC22 c IC32 IC42 b IC31 a IC21 IC11 BreadB 0J AleJ

10. Question 3 The social order will be all the more stable, the more …it does not place in opposition personal interest and the interests of society as a whole, but rather seeks ways to bring them into fruitful harmony. The social order will be all the more stable, the more …it does not place in opposition personal interest and the interests of society as a whole, but rather seeks ways to bring them into fruitful harmony.

11. First Theorem of Welfare Economics “If preferences are well-defined, and each market is characterised by perfect competition, the resulting resource allocation will be Pareto efficient” Given a starting point -> (and assuming perfect markets) The market will clear at a Pareto efficient allocation So somewhere on the contract curve So markets give us perfect allocations… right?

12. AleB 0B BreadJ C IC12 IC22 c IC32 IC42 b IC31 a IC21 IC11 BreadB 0J AleJ Points a, b and c are all (Pareto) efficient allocations Even John having all the bread and ale – and Betty starving to death – is efficient

13. Question 4

14. Question 4a – Drawing Curves

15. Question 4a – Drawing Curves

16. Question 4a Utility = X1 . X2 UtilityA= 8 x 2 = 16 UtilityB = 2 x 8 = 16

17. Question 4ii So: A = x1 and x2 UA = B = x1 and x2 UB = 8 5 2 5 16 25 2 5 8 5 16 25 Both are better off after the trade – good deal

18. Question 4iv Ready? So A wants to maximise utility UtilityA = x1 . X2 And we know that he starts with 8x1 and 2x2, which are worth £1 each So his budget constraint is 10 Therefore, x1 + x2 = 10

19. Question 4c (cont’d) x1+ x2 = 10 Re-arranging, we can get x2 = 10 – x1 Which we can substitute into the utility function UA = x1 . x2 UA = x1 ( 10 – x1 ) UA = 10x1 – x12

20. Question 4c (cont’d) UA = 10x1 – x12 Maximise utility by finding ΔU/Δx1 and setting equal to zero ΔU/Δx1= 10 – 2x1 10 – 2x1 = 0 x1 = 5 Remember the budget constraint said x1 + x2 = 10, so 5 + x2 = 10, x2 = 5

21. Question 4c (cont’d) We can do the same for person B, and we get to the same answer, where he also wants 5 of each. This can be achieved since B has 8 lots of x2 and only wants 5. A wants 3 more x2, so will buy them off B for £3. B wants 3 more x1, and A has 3 spare. So B can buy them off A. Trade has benefited both Mr A and Mr B. The equilibrium is drawn on the next page.

22. Question 4c (cont’d)

23. Question 4d

24. Question 4d

25. Question 4d

26. Question 4d

27. Question 4d