EC202: Worked Example #3.17 Frank Cowell April 2004

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Presentation transcript:

EC202: Worked Example #3.17 Frank Cowell April 2004 This presentation covers exactly the material set out in the file WorkedExamples.pdf, but with the addition of a few graphics and comments To start the presentation select Slideshow\View Show or click on icon below left. Mouse click or [Enter] to advance through slide show

WX3.17: part 1

WX3.17: part 1 y2 Larger value of A RHS is positive y1

WX3.17: part 2

WX3.17: part 2 Profits are given by: We must be on the transformation curve Substitute in to get: Maximise this with respect to y1 , y2

WX3.17: part 2 FOC are: …which gives us: Substitute back in for maximised profits:

WX3.17: part 3

WX3.17: part 3 Utility of capitalists Given the Cobb-Douglas utility function they spend equal amounts on the two goods

WX3.17: part 3 Utility of workers They maximise this given the budget constraint: This is equivalent to maximising

WX3.17: part 3 FOC is: which yields optimal labour supply: So, from the budget constraint:

WX3.17: part 4

WX3.17: part 4 No stock of goods 1 or 2. Workers do not consume good 2. So Excess demands are: Set EDs to get equilibrium:

WX3.17: part 4 From this we get: So equilibrium price ratio is From P: Solving this we get:

WX3.17: part 5 Profits in equilibrium: Wages in equilibrium: Profit/Wage ratio is independent of A.