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Econ 303 TA Session 1: Wei Dai

This document summarizes an economics tutorial session that covered: 1) Describing an Arrow-Debreu (AD) market structure for an economy with two consumers with different endowments over infinite time periods. 2) Defining an AD equilibrium as price sequences and consumption levels such that consumers maximize utility given prices and markets clear. 3) Calculating the AD equilibrium for the example economy.

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Min Jae Park
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36 views2 pages

Econ 303 TA Session 1: Wei Dai

This document summarizes an economics tutorial session that covered: 1) Describing an Arrow-Debreu (AD) market structure for an economy with two consumers with different endowments over infinite time periods. 2) Defining an AD equilibrium as price sequences and consumption levels such that consumers maximize utility given prices and markets clear. 3) Calculating the AD equilibrium for the example economy.

Uploaded by

Min Jae Park
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Econ 303 TA session 1

Wei Dai
1/27/2014

Describe an AD market structure Dene an AD equilibrium Solve an AD equilibrium

geometric series summation: 0 + 1 + 2 + 3 + .... = 1 1 1 + 2 + 3 + 4 + .... = 1 0 + 1 + 2 + 3 + ....n = 0<<1 0<<1

1 n +1 1

1 EXERCISE : A RROW-D EBREU E QUILIBRIUM


Consider an economy with two innitely lived consumers. There is one good in each period. Consumer i, i=1,2, has the utility function
t =0 i t log c t

Here ,0 < < 1, is the common discount factor. Each of the consumers is endowed with a sequence of goods: 1 1 1 (1 0 , 1 , 2 , 3 , ...) = (3, 1, 3, 1, ...)
2 2 2 (2 0 , 1 , 2 , 3 , ...) = (1, 1, 1, 1, ...)

There is no production or storage. a)Describe an Arrow-Debreu market structure for this economy, explaining when markets are open, who trades with whom, and so on.

With an AD markets structure, further markets for good are trade in period ( trade future contracts among themselves. b)Dene an Arrow-Debreu equilibrium for this economy.

), consumers

An AD equilibrium is sequences of t } price {p t =0 and )i =1,2 } consumption levels {(c t =0 such that
i t } Given {p t =0 , consumer i, i=1,2 chooses {c t }t =0 to solve {c t }t =0 t =0

max

i t log c t

such that

t =o

i t c t p

t =o

t i p t

i ct 0

t = 0, 1, 2...

Market clearing condition for all t=1,2,3...


1 2 2 t t +c = 1 c t + t

t = 0, 1, 2... c)Calculate the Arrow-Debreu equilibrium for this economy.

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