General Equilibrium

Question 1

How are the dimensions of the Edgeworth box obtained?

Answer 1

By adding the initial endowment of both consumers where the width is x1 and the length is x2

Question 2

is the initial endowment always on the budget line?

Answer 2

True

Question 3

What is the tangency condition in he edgeworth box?

Answer 3

the MRS of both indifference curves must be equal

Question 4

What should be done to make the finding of the general equilibrium easy?

Answer 4

Set the price of good 1 into 1

Question 5

What is income?

Answer 5

The value of initial endowment

Question 6

What is the demand function for a Cobb douglas utility function?

Answer 6

x1( p1, p2, m)

Question 7

What is the demand function for a Perfect complement utility function?

Answer 7

x1 = m/(p1 + p2)

Question 8

What is the demand function for a Perfect Substitutes utility function?

Answer 8

Whichever is the cheaper between the two:
x1 = m/p1 or x2 = m/p2

Question 9

How can we say if something is a feasible allocation?

Answer 9

sum of consumption should be equal to supply persisting in the economy

Question 10

Is any point in the edgeworth box a feasible allocation?

Answer 10

True

Question 11

The set of points where the indifference curves of the two consumers meet

Answer 11

Pareto set or contract curve

Question 12

How to find competitive equlibrium?

Answer 12

1.) Form demand functions based from utility functions, setting one price as the numeraire and budget equations to get income and express everything into a single price
2.) Add these demand and equate to total supply (total endowment)
3.) Solve for the price

Question 13

Equilibrium conditions in a particular market

Answer 13

Partial equilibrium

Question 14

Equilibrium conditions on several markets

Answer 14

General Equilibrium

Question 15

Final allocation

Answer 15

Allocation after both parties traded

Question 16

Allocation that improves the welfare of the other while nothing changing the other’s welfare

Answer 16

Pareto-improving allocation

Question 17

Point in the edgeworth box where gains from trade are exhausted

Answer 17

Pareto efficient allocation

Question 18

set of all pareto optimal points that are welfare improving for both relative tot their intital endowments

Answer 18

The core/Core allocation

Question 19

Demand-endowment

Answer 19

net demands or excess demand

Question 20

What is the relationship of price to trade?

Answer 20

prices determine how the market will clear achieving a Pareto optimal allocation

Question 21

First theorem of welfare economics

Answer 21

Trading in competitive markets achieve a particular pareto efficient allocation

Question 22

What leads to disequilibrium

Answer 22

when there are arbitrary prices that don’t make demand and supply equal

Question 23

Equilibrium where consumers choose goods in prices that make demand equal supply

Answer 23

walrasian equilibrium

Question 24

formula for equilibrium

Answer 24

x1A + x1B = w1A + w1B

Question 25

How is aggregate excess demand obtained

Answer 25

adding net demands of both consumers for the same good

Question 26

What happens to aggregate excess demand at equilibrium

Answer 26

it is equal to 0

Question 27

Any pareto-optimal allocation is achieved by trading in competitive markets

Answer 27

Second fundamental theorem

Question 28

If all agents have convex preferences then each pareto efficient allocation is a market equilibrium point which gives the set of equilibriump rices

Answer 28

True

Question 29

What is Partial Equilibrium analysis?

Answer 29

Analysis of a single market in isolation, holding other market conditions constant.

Question 30

What is General Equilibrium analysis?

Answer 30

Analysis of how multiple markets interact simultaneously to determine prices and resource allocations throughout an economy.

Question 31

What is the purpose of an Edgeworth Box?

Answer 31

To graphically represent an exchange economy with two consumers, two goods, and fixed total endowments, using indifference curves to show preferences.

Question 32

What do the dimensions of the Edgeworth Box represent?

Answer 32

Width = total endowment of Good 1; Height = total endowment of Good 2.

Question 33

In the Edgeworth Box, what does a point represent?

Answer 33

An allocation – a consumption bundle for Consumer A and another for Consumer B, specifying who gets how much of each good.

Question 34

What is a Feasible Allocation?

Answer 34

An allocation where the total consumption of each good equals its total endowment in the economy.

Question 35

What is an Endowment (ω)?

Answer 35

The initial bundle of goods each consumer possesses before any trade occurs.

Question 36

What is a Pareto Efficient allocation?

Answer 36

An allocation where no one can be made better off without making someone else worse off. All mutually beneficial trades are exhausted.

Question 37

What is a Pareto Improvement?

Answer 37

A reallocation of goods that makes at least one person better off without harming anyone else.

Question 38

What is the Contract Curve?

Answer 38

The set of all Pareto-efficient allocations within the Edgeworth Box.

Question 39

What is the Core of an economy?

Answer 39

The set of allocations that are both Pareto efficient and Pareto improvements over the initial endowment.

Question 40

What is a Competitive (Walrasian) Market Equilibrium?

Answer 40

A set of prices (p₁, p₂) where: 1) Each consumer maximizes utility given prices & endowment, and 2) Markets clear (total demand = total endowment for each good).

Question 41

What is Gross Demand?

Answer 41

The total quantity of a good a consumer wants to consume at given prices.

Question 42

What is Net Demand (or Excess Demand)?

Answer 42

The difference between gross demand and initial endowment (e.g., e₁ᴬ = x₁ᴬ - ω₁ᴬ). It's the amount a consumer wants to buy (if positive) or sell (if negative).

Question 43

What is Aggregate Excess Demand for a good?

Answer 43

The sum of all consumers' net demands for that good (e.g., z₁(p₁,p₂) = e₁ᴬ + e₁ᴮ).

Question 44

What condition defines market equilibrium using excess demand?

Answer 44

Aggregate excess demand for every good must be zero (z₁ = 0 and z₂ = 0).

Question 45

What does Walras' Law state?

Answer 45

For any set of prices, the sum of the value of aggregate excess demands across all markets is identically zero: p₁z₁ + p₂z₂ ≡ 0.

Question 46

What is a key implication of Walras' Law?

Answer 46

If all but one market are in equilibrium (excess demand = 0), then the last market must also be in equilibrium.

Question 47

What does the First Welfare Theorem state?

Answer 47

Every competitive market equilibrium is Pareto efficient. Under ideal conditions, markets exhaust all gains from trade.

Question 48

What is the key implication of the First Welfare Theorem?

Answer 48

Markets are efficient; competitive prices convey all necessary information for an optimal outcome.

Question 49

What does the Second Welfare Theorem state?

Answer 49

Any Pareto-efficient allocation can be achieved as a competitive market equilibrium after an appropriate redistribution of initial endowments.

Question 50

What is a crucial implication of the Second Welfare Theorem?

Answer 50

Efficiency and equity can be separated. Society can aim for a fair distribution via lump-sum transfers, then let markets achieve efficiency without price distortions.

Question 51

What are the key assumptions required for the Welfare Theorems to hold?

Answer 51

1) No externalities 2) Price-taking (competitive) behavior 3) Convex preferences 4) Continuous demand functions 5) Complete markets