Midterm 2 Review. Midterm 2 (L9-L16)  Applications of buying and selling 1.Labor Supply 2.Intertemporal Choice 3.Uncertainty  Markets and Exchange 1.Pareto.

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Presentation transcript:

Midterm 2 Review

Midterm 2 (L9-L16)  Applications of buying and selling 1.Labor Supply 2.Intertemporal Choice 3.Uncertainty  Markets and Exchange 1.Pareto (In) efficiency 2.Competitive equilibrium  Producers 1.Production function 2.Profit Maximization 3.Labor markets

Applications

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

 Possibility of Flood  Insurance contract  Budget set Uncertainty: Insurance

 Choice: Uncertainty: Insurance

 Fair insurance  Not fair insurance (Not) Fair Insurance Premium

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

Edgeworth Box (and Efficiency)

Competitive Equilibrium (Definition)

Competitive Equilibrium

Competitive Equilibrium (Geometry)

Competitive E and Pareto Efficiency