Icesi University

Department of Economics

Workshop 2
Microeconomics 3 - 2020-1

Norman Maldonado David Espada

March 12, 2020

15. Examples of general equilibrium

15.1 Suppose a pure exchange economy with two consumers whose preferences for two goods (x, y) are
given by: u1 (x1 , and1 0.8Lnx = 01+ 0.2Lny1 ,u2 (x2 , and2 = 0.2 ln x2+ 0.8Lny2 The allocations are1(2,2)
ω2(2,2).
a) Find and graph the supply-price curve of each consumer
b) Find the allocation of resources generated by the markets based on the supply-price curve.
c) Find the socially desirable allocations under the Pareto criterion
d) Suppose that the endowments change to ω1(0,4), omega2(4,0)
1) Find the resource allocation made by the market and the price vector that supports it.
2) Find the set of socially desirable allocations under the Pareto efficiency criterion.
3) Economically interpret the changes that occurred regarding the allocations (positive and nor-
motive) of numeral a.

15.2 Suppose a pure exchange economy with two consumers whose preferences for two goods (x, y) are
given by: u1 (x11, x21, x31) =α11Lnx11+α21Lnx21+α31Lnx31,u2 (x12, x22, x3,2 ) =α12Lnx12+α22Lnx22 +
3
α32Lnx32The endowments are1(5,5,5),ω2(5,5,5). The weights of the goods satisfy l=1αI, l= 1 for all l, i,
P
αl,i≥0 ∀l, i
15.3 Consider a pure exchange economy with two consumers A and B and two goods x and y. Preferences-
Consumer demands are given by the following utility functions: uA (xA , andA ) = max{xA , yA },
uB (xB , yB ) = max{xB , andB The endowment of goods for consumers isA= (1,1),ωB(1,1)
a) Find, if it exists, the resource allocation generated by the markets and the price vector that supports it.
b) Find the set of socially desirable allocations under the Pareto efficiency criterion.
c) Starting from the initial problem, suppose there is an increase in consumer B's endowments of the good.
and which become 3 units. Find, if it exists, the allocation of resources that the markets generate.
d) Explain economically the changes that occur in the market with respect to the initial situation.

15.4 For the economies of the previous points, determine if the two theorems of welfare are satisfied.

15.5 The consumers have the following utility functions and endowments.

1
u1 (x11, x21) =x11-x21−8 8 , ω1(2, r)
1
u2 (x12, x22) =−x12−8+x22, ω2(r, 2)
8

It is chosen that the equilibrium prices are whole numbers.

a) Calculate the offer curves
b) Graph the Edgeworth Box and the offer curves
c) Calculate the Walrasian equilibrium
 15.6 Consider a pure exchange economy consisting of two goods X and Y, and two consumers A and B.
whose preferences are represented by the following utility functions
uA (xA ,andA ) =xA y AuB (xB ,andB ) =xB y B
for(xA ,yA )>0y(xB ,andB )>0
The endowments of consumers are
ω A(1,2), ωB(2,2)
Check the first theorem of welfare economics.

15.7 Consider an Edgeworth box economy where consumers have Cobb utility functions.
α x1−α yu (x , x ) =xβ x1−β The consumer endowments are (ω , ω
Douglas1 (x11, x21) =x11 2 21 12 22 12 22 1i 2i
1.2
a) Find the equilibrium price ratio and the allocation.
b) How do these variables change with a small change in ω?11?

15.8 Calculate the equilibria of the following Edgeworth box economy.

1
u1 (x11, x21) = (x−112+(1327)3 x−212 ) − 2 ,w1(1,0)
1
u2 (x12, x22) = ((1327)3 x−122+x−222 ) − 2 ,w1(0,1)
15.9 Let us consider a pure exchange economy composed of two goods X and Y, and two consumers A.
Their preferences are represented by the following utility functions (Leontief type)

uA (xA ,andA ) =m´ın{αx xA , αy y A }

uB (xB ,andB ) =m´ın{βx xB , βy y B }
Consumer endowments are
wA(10,0),wB(0,20)
a) Find the Walrasian equilibrium for αx=αy=βx=βy= 1
b) Find the Walrasian equilibrium for αx=αy=βx=βy= 2
c) Find the Walrasian equilibrium for αx= 1, αy= 4, βx= 6βy= 3
d) Explain economically the difference between the results of the previous items.

15.10 Exercise 15.B.6

15.11 Exercise 15.B.9

15.12 Exercise 15.D.8

16. Balance and well-being

16.1 Suppose an economy of pure exchange with two consumers whose preferences for two goods (x, y) are
given by: u1 (x1 , and1 =Lnx1+Lny1 ,u2 (x2 , and2 Lnx2+Lny2 The allocations are1(2,2),ω2(2,2).
a) Find the resource allocation generated by the markets and the set of socially optimal allocations
desirable (in the Pareto sense)
b) Suppose that the endowments change to ω1(1,2), ω2(3,2)
1) Find the resource allocation that the market makes and the price vector that supports it.
2) Find the set of socially desirable allocations under the criterion of Pareto efficiency.
3) Economically interpret the changes that occurred regarding the allocations (positive and negative)
motive) of numeral a.

16.2 Consider a competitive economy with production in which there is a single company that produces the good2, using
√
how to input the good3 according to the following production function x2 (x3 ) = x3 The benefits are distributed by
1/2
equal parts between two consumers, A and B, whose utility functions and endowments are Ui (xi1 , xi2 ) =x1/2 i1 x i2
para A, B and the endowments of the consumer of each good are ωi(2,0,1)
a) Find, if it exists, the resource allocation made by the market and the price vector that supports it.
b) Find the set of socially desirable allocations under the Pareto efficiency criterion.
 c) Suppose that this economy receives a positive technology shock that increases the production of the good
x2I need fewer units of goodx.3to be produced (for example, a process innovation in the
that with the same labor force more is produced, as happens with the division of labor). In particular,
2
the productive process of the good2after the technological crash2 (x3 ) =x33Find, if it exists, the
allocation of resources made by the market and the price vector that supports it.
d) Economically interpret the effects of the technological shock.

16.3 Consider an economy with two goods X, Y and with the following characteristics:
Xes produced by 15 firms, each firm has the following production function x = 20Lx1/2 , whereLxis
the number of hours worked to produce X.
Yes produced by 15 firms, with the following production function: y = 120Ly1/3 , whereLyit is the number
of hours worked to produceY
100 consumers, all with the following utility function u(x, y, z) = 20x1/2 yz 2 where you reduce consumption
from the merchandise X, yes the consumption of the merchandise Y and yes leisure (hours available to work less
hours worked.
The number of hours available to work is 16 hours per day (they sleep 8 hours).
All consumers have the same share in the benefits.
a) Find, if it exists, the resource allocation generated by the markets and the price vector that supports it.
b) Find the set of socially desirable allocations under the Pareto efficiency criterion.
c) Starting from the initial problem, suppose there is a generalized increase in the available hours to
work (for example, during the Christmas season), which becomes 15 hours a day (they sleep 9 hours). Find
the allocation of resources generated by the markets
d) Explain economically the changes that occur in the market with respect to the initial situation.
16.4 Consider a pure exchange economy with two consumers A and B and two goods x and y. The preferences-
The preferences of consumers are given by the following utility functions: uA (xA , andA ) =max{xA , andA },
uB (xB , andB ) = max{xB , andB The provision of goods to consumers isA(1,1), omegaB(1,1)
a) Find, if it exists, the allocation of resources generated by the markets and the price vector that supports it.
b) Find the set of socially desirable assignments under the criterion of Pareto efficiency.
c) Starting from the initial problem, suppose there is an increase in consumer B's endowments of the good.
And that becomes 3 units. Find, if it exists, the resource allocation that markets generate.
d) Explain economically the changes that occur in the market regarding the initial situation.

16.5 For the economies of the previous points, determine if the two theorems of welfare are satisfied.

16.6 Of consumers i = 1, 2
u1 (x1 , and1 ) =x1αy1−α
1 ,ω1(2,2)

u2 (x2 , and2 ) =xβ y2 1−β2 ,ω2(2,2)

Find the contract curve

16.7 Of consumers i = 1,2

u1 (x1 , and1 ) =x1αy1−α
1 ,ω1(2,2)

u2 (x2 , and2 ) =xβ y2 1−β2 ,ω2(2,2)

Determine if the first and second welfare theorems are fulfilled in this economy.

16.8 To consumers i= 1,2

u1 (x1 , and1 ) =x1αy1−α
1 ,ω1(2,2)

u2 (x2 , and2 ) =xβ y2 1−β2 ,ω2(2,2)

Formally demonstrate that the two theorems of welfare are satisfied.

16.9 Consider a pure exchange economy with two consumers A and B and two goods x and y. The preferences
The consumers' preferences are given by the following utility functions:
uA (xA , andA =max{xA , yA },B (xB , andB ) =max{xB , andB The provision of goods to consumers is like
continueA= 1 1
,ωB= 5 3
3, 2 3, 2
Find, if it exists, the resource allocation that the market makes and the price vector that supports it.
16.10 Suppose a pure exchange economy in which the consumer preference relation i = 1, ..., I over
Goods (n= 1, ..., N) are represented by the Cobb-Douglas utility function given by ( represents a
Q
productory):

N N
β
ui (xi ) = Y xi,nn, βn>0, X βn = 1,
n=1 n=1

The budget set is given by B.p,ω={x∈RN:p·xI≤p·ωi }, whereωiWhat is the vector with the
provisions of consumer of all goods.
a) Use the welfare theorems to determine whether the Walrasian equilibrium of this economy is socially optimal.
desirable, that is to say, it is a Pareto optimal.
b) Suppose a private property economy with consumers whose preferences and endowments are
defined as in the previous number, and with confirmations that use two inputs1yx2to produce the good
x5 The technology used to transform inputs into the good it produces is a Cobb Douglas technology.
f ( x 1 , x2 ) =x1αxβ , where
2 α+β < 1. The prices of the inputs x1yx2sonp1yp2 , respectively, and
the price of the good produced5 Use the theorems of welfare to determine if the allocations
socially desirable outcomes of this economy can be achieved through the market (under certain redistribution)
of wealth)

16.11 Suppose an economy of pure exchange with two consumers whose preferences for two goods (x, y) are
given by: u1 (x1 , and1 ) =lnx1+ 2lny1 ,u2 (x2 , and2 ) = 2lnx2+lny2 The allocations are1(3,4), ω2(4,3)
a) Find, if it exists, the allocation of resources generated by the markets
b) Find, if it exists, the set of socially desirable allocations (in the Pareto sense)

16.12 Exercise 16.G.5

16.13 Deepening - CGE. Use the simple CGE model presented in chapter 2 and calibrated in chapter 5.
from Hosoe to answer the following questions:
a) Find the analytical solution of the model and interpret its results economically.
b) Find the numerical solution of the model and show that it coincides with the analytical solution
c) Suppose a shock to the capital endowments such that the capital endowments increase to 50.
1) Find the analytical solution of the model
a 0Intuitively explain all the effects that the shock will cause in the economy
b 0Using comparative statics in the analytical solution of the initial model, formally show the
effects of the shock on the economy
c 0Economically explain each of the effects found in the previous section.
d 0Contrast the initial intuition with the formal results.
2) Find the numerical solution of the model and show that it matches the analytical solution.