I have turned off Moderation on the blog. I'll leave it that way as along as we don't get a lot of spam. If the spam does come will go to Plan B. (At the moment, I don't have Plan B.)
Use this post to ask questions you have about doing the first homework. Do so in the comments area for this post. For each subsequent homework, I will make a post so you can ask questions on that particular assignment. As I said in class yesterday, other students are free to respond to those questions. It would be good for you to do that. Sometimes students understand better than the instructor the difficulty encountered and the work around they found.
In the demo yesterday, I showed that there are blank cells for you to do "scratch work" as you complete your assignment. But many people are more comfortable with a pencil and paper, writing out what needs to be solved, drawing a diagram, or working an equation. So I encourage you to find an approach that fits the way you think.
I am curious about that so perhaps after the or third homework, when a routine has been established, I will poll the class about how each of you go about doing this.
I have a question about B's MRS in the General Equilibrium part of the HW. I got A's MRS correct and got B's endowment for X and Y to be 73 and 45 respectively. Using the same formula for MRS as I used to get the correct answer for A, B's is not correct. Which doesn't make any sense. Not sure if this is a mistake in the HW or not...please advise, thanks!
ReplyDeleteWilliam Baumol - thanks for being the first student to post a question. Let me make one observation before giving you some suggestions. Each student gets an Edgeworth box of different dimensions, based on their alias. So the specific numbers you get will be unique to your solution of the general problem.
ReplyDeleteLets talk about what the question is asking you to do. In principle you need to find 4 numbers, the amount of Good X that A gets, the amount of Good X the B gets, the amount of Good Y that A gets, and the amount of Good Y that B gets.
But it is simpler than that because what A gets plus what B gets must add up to the total endowment. So if A gets XA of Good X and the Endowment of Good X is XTotal, then XB = XTotal - XA. And likewise for how Good Y is allocated. Thus you really need to find only A's allocation. B's allocation is implied by that.
The paragraph above is true for any allocation in the Box. But only at a P.O. allocation does A's MRS = B's MRS. So you need to use that fact to see what implication it has for A's allocation.
See if that helps.
On a related front - I took some medication not too long ago and expect to be nodding off soon. This might be it for tonight but I will check on further questions and comments in the morning and respond then.
Thank you for the response, I had the correct answer all along but Excel would only take it after I did the actual calculation in the box instead of with my calculator.
ReplyDeleteNow stuck on the last problem of Pareto Optimality on what the optimal allocation is for good A. If anyone has any advice on how to get started on this I'm sure I'm not the only one, thanks!
So the concept of Pareto Optimal is to make one person as best off as possible, even at the expense of the other. If you think about it, person A would benefit most from getting all the goods..
DeleteIt does not matter that person B will be worse off.
Pareto Optimality is an efficiency concept. There are many Pareto Optimal allocations in the Edgeworth Box. Collectively, they make the Contract Curve. There is one extreme P.O. allocation where one consumer gets the entire endowment, that's true. But there is the opposite extreme as well and a continuum of P.O. Allocations in between. When an allocation is not P.O., then one can make both consumers better off. In popular parlance that is called Win-Win. Starting from a P.O. allocation, to make one consumer better off, the other must be made worse off. So movements along the Contract Curve are Zero Sum.
DeleteThere is a well known equity concept attributed to the philosopher, John Rawls, derived from what is called the Veil of Ignorance. It says that society's goal should be to make the worst off individual as well off as possible. In game theory language it advocates for society to play a maximin strategy. Rawls is worth reading, but we won't do so as part of our course.
I am still confused on the homework assignment. For "selecting a proposed alternative allocation for A", is the answer supposed to give you a response saying that both A and B approve the trade? Also, for the last problem "to identify A's allocation in a P.O. allocation", is there a certain equation that has to be used? I am not sure how to start the algebra for that problem.
ReplyDeleteYes both should approve the trade. Let's go a bit further in thinking about it. As long as the initial allocation is not Pareto Optimal, A's MRS and B's MRS will be different. A proposed trade will have an exchange ratio somewhere in between. (To make the arithmetic easy, you might envision that the actual exchange ratio is an integer between the two MRS.) A small trade of that sort should make both consumers better off.
ReplyDeleteThe equation you want is that A's MRS equals B's MRS or YA/XA = (YTotal - YA)/(XTotal - XA). You then need to solve that by cross mutliplying.
I hope that helps.