General Equilibrium

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Questions and Answers

What does general equilibrium refer to in the context of an exchange economy?

A single consumer's optimal allocation of goods
A scenario with limited goods and consumers
The situation where all markets are in equilibrium simultaneously (correct)
An economy where resources are not efficiently allocated

Which of the following statements correctly describes the setup of the exchange economy?

Each consumer can generate additional income from external sources
Both consumers have initial endowments of each good (correct)
There are three consumers and one good
Prices of goods are fixed and do not affect demand

In the budget constraint equation for consumer A, which of the following correctly represents their total income?

$I_A = px e_A + py e_A$ (correct)
$I_A = px e_A + py e_B$
$I_A = px e_A + py e_A + pc e_C$
$I_A = px e_B + py e_B$

Which of the following factors directly influences consumer demand within the budget constraints?

Prices of goods and consumer income (D) Signup and view all the answers

What is the primary role of consumers A and B in the exchange economy as outlined?

To trade their initial endowments to fulfill their needs (C) Signup and view all the answers

What is necessary for an equilibrium in the economy?

Optimization and market clearing are required. (C) Signup and view all the answers

What does the term 'market clearing' signify in a general equilibrium framework?

Equating supply and demand in multiple markets simultaneously. (D) Signup and view all the answers

According to Walras's Law, which of the following statements is correct?

If all but one market clears, the final market will clear as well. (B) Signup and view all the answers

What do we need to find to define an equilibrium in a market?

Allocations of goods and prices for each good. (C) Signup and view all the answers

How can equilibrium prices and allocations be practically solved?

By finding Marshallian demands and applying market clearing conditions. (B) Signup and view all the answers

What is the utility function used for both consumers?

U(x, y) = x^{1/2}y^{1/2} (C) Signup and view all the answers

What is the Marshallian demand for good x for consumer A?

$\frac{1}{2} \frac{25px + 75py}{px}$ (C) Signup and view all the answers

How is the income for consumer A calculated?

$I_A = 25px + 75py$ (B) Signup and view all the answers

What condition must be satisfied for the market to clear for good x?

$x_A + x_B = e_A + e_B$ (B) Signup and view all the answers

What is the equilibrium allocation of good x for both consumers?

$x_A = 50, x_B = 50$ (D) Signup and view all the answers

What does the equality of the prices of the two goods imply?

The market is in equilibrium. (A) Signup and view all the answers

Which of the following represents the correct expression for Marshallian demand of good y for consumer B?

$\frac{1}{2} \frac{75px + 25py}{py}$ (A) Signup and view all the answers

If the prices of both goods are the same, what can be inferred about the consumer's preferences?

Consumers are indifferent between the two goods. (D) Signup and view all the answers

What does the result of the market clearing prices indicate about relative prices?

It shows that both goods must have the same price. (B) Signup and view all the answers

What is the total endowment of good x across both consumers?

100 (A) Signup and view all the answers

Flashcards

Exchange Economy

A simple economic model where consumers trade goods with each other based on their initial endowments.

Endowment

The initial amount of goods a consumer possesses in an exchange economy. It's their starting point for trading.

Budget Constraint

Limits consumers' spending based on the value of their endowment and the prices of goods.

Walrasian General Equilibrium

A state where all markets in an economy are in equilibrium simultaneously, meaning supply equals demand for all goods.