MICROECONOMICS 2 TUTORIAL 3: EXCHANGE Timing of Tutorial Chapter 8 is crucial to the understanding of this tutorial. Purpose of Tutorial To work through in detail the implications of a particular form of a general equilibrium story as told in the lectures; in so doing to understand more fully the implications of general equilibrium; to show how the desire for exchange and the ability to exchange affect the outcome of the exchange process and the resulting welfare properties. Document Preview: MICROECONOMICS 2 TUTORIAL 3: EXCHANGE Timing of Tutorial Chapter 8 is crucial to the understanding of this tutorial. Purpose of Tutorial To work through in detail the implications of a particular form of a general equilibrium story as told in the lectures; in so doing to understand more fully the implications of general equilibrium; to show how the desire for exchange and the ability to exchange affect the outcome of the exchange process and the resulting welfare properties. Prior Preparation You should try all parts of this tutorial in advance of the tutorial; your tutor will assume that you have done so. Written Work after Tutorial You should complete all parts of the tutorial for your own records; your tutor will check what you have written if you want. Relevance to Examination Very relevant. You may well be asked a question which explores your understanding of the importance of exchange and the conditions for mutually advantageous exchange. The story concerns a very simple economy in which there are just two individuals and two goods. We call the individuals Individual A and Individual B and the two goods Good 1 and Good 2. The two individuals are similar in the sense that they both like both goods though, as we shall see, their preferences are not identical. The two individuals also differ in that Individual A is endowed only with Good 1 while Individual B is endowed only with Good 2. Let us denote the initial endowment of Good 1 given to Individual A by e1, and let us denote the initial endowment of Good 2 given to Individual B by e2. As we have already remarked both individuals like both goods. Specifically both have Cobb-Douglas preferences over the two goods, Individual A with parameter a and Individual B with parameter b. Hence we can write the utility function of Individual A as UA(q1A, q2A) = a log q1A + (1 -a) log q2A and the utility function of Individual B as UB(q1B, q2B) = b log q1B + (1 b) log q2B where qiC denotes the quantity of Good i (=1,2) Attachments: tutorial-3.pdf; MICROECONOMICS 2 TUTORIAL 3: EXCHANGE Timing of Tutorial Chapter 8 is crucial to the understanding of this tutorial. Purpose of Tutorial To work through in detail the implications of a particular form of a general equilibrium story as told in the lectures; in so doing to understand more fully the implications of general equilibrium; to show how the desire for exchange and the ability to exchange affect the outcome of the exchange process and the resulting welfare properties. Document Preview: MICROECONOMICS 2 TUTORIAL 3: EXCHANGE Timing of Tutorial Chapter 8 is crucial to the understanding of this tutorial. Purpose of Tutorial To work through in detail the implications of a particular form of a general equilibrium story as told in the lectures; in so doing to understand more fully the implications of general equilibrium; to show how the desire for exchange and the ability to exchange affect the outcome of the exchange process and the resulting welfare properties. Prior Preparation You should try all parts of this tutorial in advance of the tutorial; your tutor will assume that you have done so. Written Work after Tutorial You should complete all parts of the tutorial for your own records; your tutor will check what you have written if you want. Relevance to Examination Very relevant. You may well be asked a question which explores your understanding of the importance of exchange and the conditions for mutually advantageous exchange. The story concerns a very simple economy in which there are just two individuals and two goods. We call the individuals Individual A and Individual B and the two goods Good 1 and Good 2. The two individuals are similar in the sense that they both like both goods though, as we shall see, their preferences are not identical. The two individuals also differ in that Individual A is endowed only with Good 1 while Individual B is endowed only with Good 2. Let us denote the initial endowment of Good 1 given to Individual A by e1, and let us denote the initial endowment of Good 2 given to Individual B by e2. As we have already remarked both individuals like both goods. Specifically both have Cobb-Douglas preferences over the two goods, Individual A with parameter a and Individual B with parameter b. Hence we can write the utility function of Individual A as UA(q1A, q2A) = a log q1A + (1 -a) log q2A and the utility function of Individual B as UB(q1B, q2B) = b log q1B + (1 b) log q2B where qiC denotes the quantity of Good i (=1,2) Attachments: tutorial-3.pdf
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