Chapter Thirty.ppt

Chapter Thirty Production Exchange Economies (revisited) No production, only endowments, so no description of how resources are converted to consumables. General equilibrium: all markets clear simultaneously. 1st and 2nd Fundamental Theorems of Welfare Economics. Now Add Production ... Add input markets, output markets, describe firms’ technologies, the distributions of firms’ outputs and profits … Now Add Production ... Add input markets, output markets, describe firms’ technologies, the distributions of firms’ outputs and profits … That’s not easy! Robinson Crusoe’s Economy One agent, RC. Endowed with a fixed quantity of one resource -- 24 hours. Use time for labor (production) or leisure (consumption). Labor time = L. Leisure time = 24 - L. What will RC choose? Robinson Crusoe’s Technology Technology: Labor produces output (coconuts) according to a concave production function. Robinson Crusoe’s Technology Robinson Crusoe’s Technology Robinson Crusoe’s Preferences RC’s preferences: coconut is a good leisure is a good Robinson Crusoe’s Preferences Robinson Crusoe’s Preferences Robinson Crusoe’s Choice Robinson Crusoe’s Choice Robinson Crusoe’s Choice Robinson Crusoe’s Choice Robinson Crusoe’s Choice Robinson Crusoe’s Choice Robinson Crusoe’s Choice Robinson Crusoe’s Choice Robinson Crusoe’s Choice Robinson Crusoe as a Firm Now suppose RC is both a utility-maximizing consumer and a profit-maximizing firm. Use coconuts as the numeraire good; i.e. price of a coconut = $1. RC’s wage rate is w. Coconut output level is C. Robinson Crusoe as a Firm RC’s firm’s profit is ? = C - wL. ? = C - wL ? C = ? + wL, the equation of an isoprofit line. Slope = + w . Intercept = ? . Isoprofit Lines Profit-Maximization Profit-Maximization Profit-Maximization Profit-Maximization Profit-Maximization Profit-Maximization Profit-Maximization Profit-Maximization Profit-Maximization Profit-Maximization Utility-Maximization Now consider RC as a consumer endowed with $?* who can work for $w