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May 2, 2020Assignment: Practicum – Week 9 Journal Entry
May 4, 2020
- Using standard partial equilibrium analysis, show that technological progress that reduces production cost may not increase producer surplus. More precisely, imagine there is only one producer, and is a price taker.
(a) Using the graph of partial equilibrium, construct an example where reduction in marginal leads to reduction in producer surplus. (b) Suppose the firm is a monopolist who can choose price freely. Is there any instance that reduction in marginal leads to reduction in producer surplus? - Using Edgeworth box, prove that transfer paradox occurs only if there are multiple equilibria—there is an initial allocation that has multiple equilibrium.
- Suppose there are two individuals and two goods. Preferences are given by u1(x,y) = max{x,y} and u2(x,y) = xy
Suppose that the initial endowments are
ω1 = (4,6)
and
ω2 = (6,4)
(a) Using Edgeworth box, argue there is no competitive equilibrium. (b) Now take a replica of this economy. That is, there are 4 individuals. Two of them have utility function max{x,y} and initial endowment (4,6)
The remaining two individuals have utility function
xy
and initial endowment
(6,4)
Now equilibrium exists. Derive one.
