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    Economics 101A (Lecture 26, Revised) : Stefano Dellavigna

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    BagasNurWibowow
    This document summarizes key concepts from Economics 101A including: 1. Barter equilibrium occurs when individual rationality and Pareto efficiency conditions are met through direct exchange between consumers. 2. Walrasian equilibrium exists when prices clear markets and consumers maximize utility subject to budget constraints. It is a subset of possible barter equilibria. 3. An example is provided to illustrate Walrasian equilibrium using Leontief and Cobb-Douglas preferences. 4. The Save More Tomorrow plan successfully used inertia to increase savings rates by automatically raising contribution levels at times of pay increases, showing people prefer to save in the future rather than presently.

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    Economics 101A (Lecture 26, Revised) : Stefano Dellavigna

    Uploaded by

    BagasNurWibowow
    77 views21 pages
    This document summarizes key concepts from Economics 101A including: 1. Barter equilibrium occurs when individual rationality and Pareto efficiency conditions are met through direct exchange between consumers. 2. Walrasian equilibrium exists when prices clear markets and consumers maximize utility subject to budget constraints. It is a subset of possible barter equilibria. 3. An example is provided to illustrate Walrasian equilibrium using Leontief and Cobb-Douglas preferences. 4. The Save More Tomorrow plan successfully used inertia to increase savings rates by automatically raising contribution levels at times of pay increases, showing people prefer to save in the future rather than presently.

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    This document summarizes key concepts from Economics 101A including: 1. Barter equilibrium occurs when individual rationality and Pareto efficiency conditions are met through direct exchange between consumers. 2. Walrasian equilibrium exists when prices clear markets and consumers maximize utility subject to budget constraints. It is a subset of possible barter equilibria. 3. An example is provided to illustrate Walrasian equilibrium using Leontief and Cobb-Douglas preferences. 4. The Save More Tomorrow plan successfully used inertia to increase savings rates by automatically raising contribution levels at times of pay increases, showing people prefer to save in the future rather than presently.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    77 views21 pages

    Economics 101A (Lecture 26, Revised) : Stefano Dellavigna

    Uploaded by

    BagasNurWibowow
    This document summarizes key concepts from Economics 101A including: 1. Barter equilibrium occurs when individual rationality and Pareto efficiency conditions are met through direct exchange between consumers. 2. Walrasian equilibrium exists when prices clear markets and consumers maximize utility subject to budget constraints. It is a subset of possible barter equilibria. 3. An example is provided to illustrate Walrasian equilibrium using Leontief and Cobb-Douglas preferences. 4. The Save More Tomorrow plan successfully used inertia to increase savings rates by automatically raising contribution levels at times of pay increases, showing people prefer to save in the future rather than presently.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 21

    Economics 101A

    (Lecture 26, Revised)

    Stefano DellaVigna

    December 4, 2003

    Outline

    1. Barter

    2. Walrasian Equilibrium

    3. Example

    4. An Example of Excellent Economics

    5. Unsolicited advice

    Barter
    Consumers can trade goods 1 and 2

    Allocation
    of barter if:

    1
    1
    2
    2
    (x1 , x2 ), (x1 , x2 ) can be outcome

    Individual rationality.

    i) u ( i , i ) for all i
    ,
    x
    ui(xi
    i 1 2
    1
    2

    1
    1
    2
    2
    Pareto Eciency. There is no allocation (
    x1, x
    2), (
    x1, x
    2 )

    such that

    i) for all i
    xi1, x
    i2) ui(xi
    ,
    x
    ui(
    1
    2

    with strict inequality for at least one agent.

    Barter outcomes in Edgeworth box


    Endowments (1, 2)

    Area that satisfies individual rationality condition


    Points that satisfy pareto eciency

    Pareto set. Set of points where indierence curves


    are tangent

    Contract curve. Subset of Pareto set inside the


    individually rational area.

    Contract curve = Set of barter equilibria

    Multiple equilibria. Depends on bargaining power.

    Bargaining is time- and information-intensive procedure

    What if there are prices instead?

    Walrasian Equilibrium
    Prices p1, p2
    Consumer 1 faces a budget set:

    p1x11 + p2x12 p111 + p212

    How about consumer 2?


    Budget set of consumer 2:

    p1x21 + p2x22 p121 + p222


    or (assuming x1i + x2i = i)

    1
    1
    1
    1
    p1( 1x1)+p2 1 x2 p1 1 1 +p2 2 2

    or

    p1x11 + p2x12 p111 + p212

    1), (x2, x2), p, p


    (x1
    ,
    x
    1
    2
    1
    2
    1 2

    Walrasian Equilibrium.
    is a Walrasian Equilibrium if:

    Each consumer maximizes utility subject to budget constraint:

    i
    i
    i
    i
    (x1 , x2 ) = arg max ui (x1, x2
    xi1,xi2
    s.t. p1xi1 + p2xi2 p1i1 + p2 i2

    Markets clear:
    2
    1
    2
    x1
    j + xj j + j for all j.

    Compare with partial (Marshallian) equilibrium:


    each consumer maximizes utility
    market for good i clears.
    (no requirement that all markets clear)

    Graphical depiction in Edbeworth box. Set of optimal points as prices p1 and p2 vary.

    Draw oer curve for consumer 1 (equivalent of demand curve in partial equilibrium):
    1
    (x1
    1 (p1, p2, ( 1, 2)) , x2 (p1, p2, ( 1, 2)))

    Oer curve is set of points that maximize utility as


    function of the varying prices p1 and p2.

    Draw oer curve for consumer 2.

    Walrasian Equilibrium is at intersection of the two


    oer curves!

    Walrasian Equilibrium is a subset of barter equilibrium:


    Does satisfy individual rationality?

    Does it satisfy the Pareto Eciency condition?

    Is any point in Contract Curve a WE for allocation ( 1, 2)?

    Example
    Consumer 1 has Leontie preferences:

    u(x1,x2) = min x11, x12

    Bundle demanded by consumer 1:


    p1 11 + p212
    1
    1
    1
    x1 = x2 = x =
    =
    p1 + p2
    11 + (p2/p1) 12
    =
    1 + (p2/p1)

    Consumer 2 has Cobb-Douglas preferences:

    .5 .5
    2
    x22
    u(x1,x2) = x1

    Demands of consumer 2:
    x2
    1 =
    and
    x2
    2 =

    .5 p111 + p212

    p1

    .5 p111 + p212
    p2

    p
    = .5 11 + 2 12
    p

    p1 1
    = .5
    1 + 12
    p2

    !
    !

    Impose Walrasian equilibrium in market 1:


    2
    1
    2
    x1
    1 + x1 = 1 + 1

    This implies
    11 + (p2/p1) 12
    + .5
    1 + (p2/p1)

    p
    11 + 2 12 = 11 + 21
    p1

    An example of Excellent Economics


    Savings Rate in the US very low: essentially zero in
    year 2,000

    Perhaps: Self-control Problem

    People would like to save but...Not today!

    Credit cards and (too) high borrowing rates

    Is this testable?

    Prediction of hyperbolic discounting theory:


    people do not like to save today
    people like to save tomorrow

    Save Tomorrow?

    Benartzi and Thaler (2002): Design of Save More


    Tomorrow (SMT) Plan
    401(k) private savings or retirement

    SMT Plan:
    No increase in savings today

    3% automatic increase in savings at time of paycheck raise

    can drop out at any time

    Advantages:
    No current increase

    Commit today for future

    Use inertia/procrastination the good way!

    No decrease in nominal salary (loss aversion)

    Option out

    The facts:
    1998: mid-size company, 315 eligible employees
    you guys are saving too little!
    79 employees: increase savings now
    162 employees: no increase now, will try SMT
    158 employees: remain in SMT plan for two years

    Eect: savings rate up from 3.5 to 11.6 percent!


    In three years!

    Advice

    1. Listen to your heart

    2. Trust yourself

    3. Take good risks:


    (a) hard courses
    (b) internship opportunities
    (c) research URAP
    (d) (graduate classes?)

    4. Learn to be curious, critical, and frank

    5. Be nice to others! (nothing in economics tells you


    otherwise)

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