Midterm 2 Review.

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Presentation transcript:

Midterm 2 Review

Three parts (L9-L18) Applications of buying and selling Intertemporal Choice Uncertainty Markets and Exchange Pareto (In) efficiency Competitive equilibrium Producers Production function Profit Maximization Labor markets Cost Minimization (cost functions)

Uncertainty Two states, probabilities Bundle = lottery Bernouli and Von Neumann-Morgenstern U. Examples:

Risk Aversion Expected value of lottery: Examples Risk aversion better than Utility and risk aversion

Utility and Risk Aversion

Certainty Equivalent Certainty equivalent of lottery Example Risk Aversion:

Uncertainty: Insurance Possibility of Flood Insurance contract Budget set

Uncertainty: Insurance Choice:

Markets and Exchange (key ideas) Edgeworth Box (apple-orange, IC, U) Competitive Equilibrium Pareto Efficiency Competitive Equilibrium Pareto efficient? Application: apple-orange, IC, U

Edgeworth Box

Competitive Equilibrium

Competitive Equilibrium

Competitive Equilibrium (Geometry)

Competitive E and Pareto Efficiency

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