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1、Chapter Thirty,Production,Exchange Economies (revisited),No production, only endowments, so no description of how resources are converted to consumables. General equilibrium: all markets clear simultaneously. 1st and 2nd Fundamental Theorems of Welfare Economics.,Now Add Production .,Add input marke
2、ts, output markets, describe firms technologies, the distributions of firms outputs and profits ,Now Add Production .,Add input markets, output markets, describe firms technologies, the distributions of firms outputs and profits Thats not easy!,Robinson Crusoes Economy,One agent, RC. Endowed with a
3、fixed quantity of one resource - 24 hours. Use time for labor (production) or leisure (consumption). Labor time = L. Leisure time = 24 - L. What will RC choose?,Robinson Crusoes Technology,Technology: Labor produces output (coconuts) according to a concave production function.,Robinson Crusoes Techn
4、ology,Production function,Labor (hours),Coconuts,24,0,Robinson Crusoes Technology,Labor (hours),Coconuts,Production function,24,0,Feasible production plans,Robinson Crusoes Preferences,RCs preferences: coconut is a good leisure is a good,Robinson Crusoes Preferences,Leisure (hours),Coconuts,More pre
5、ferred,24,0,Robinson Crusoes Preferences,Leisure (hours),Coconuts,More preferred,24,0,Robinson Crusoes Choice,Labor (hours),Coconuts,Feasible production plans,Production function,24,0,Robinson Crusoes Choice,Labor (hours),Coconuts,Feasible production plans,Production function,24,0,Leisure (hours),24
6、,0,Robinson Crusoes Choice,Labor (hours),Coconuts,Feasible production plans,Production function,24,0,Leisure (hours),24,0,Robinson Crusoes Choice,Labor (hours),Coconuts,Feasible production plans,Production function,24,0,Leisure (hours),24,0,Robinson Crusoes Choice,Labor (hours),Coconuts,Production f
7、unction,24,0,Leisure (hours),24,0,C*,L*,Robinson Crusoes Choice,Labor (hours),Coconuts,Production function,24,0,Leisure (hours),24,0,C*,L*,Labor,Robinson Crusoes Choice,Labor (hours),Coconuts,Production function,24,0,Leisure (hours),24,0,C*,L*,Labor,Leisure,Robinson Crusoes Choice,Labor (hours),Coco
8、nuts,Production function,24,0,Leisure (hours),24,0,C*,L*,Labor,Leisure,Output,Robinson Crusoes Choice,Labor (hours),Coconuts,Production function,24,0,Leisure (hours),24,0,C*,L*,Labor,Leisure,MRS = MPL,Output,Robinson Crusoe as a Firm,Now suppose RC is both a utility-maximizing consumer and a profit-
9、maximizing firm. Use coconuts as the numeraire good; i.e. price of a coconut = $1. RCs wage rate is w. Coconut output level is C.,Robinson Crusoe as a Firm,RCs firms profit is = C - wL. = C - wL C = + wL, the equation of an isoprofit line. Slope = + w . Intercept = .,Isoprofit Lines,Labor (hours),Co
10、conuts,24,Higher profit;,Slopes = + w,0,Profit-Maximization,Labor (hours),Coconuts,Feasible production plans,Production function,24,0,Profit-Maximization,Labor (hours),Coconuts,Production function,24,0,Profit-Maximization,Labor (hours),Coconuts,Production function,24,0,Profit-Maximization,Labor (hou
11、rs),Coconuts,Production function,24,C*,L*,0,Profit-Maximization,Labor (hours),Coconuts,Production function,24,C*,L*,Isoprofit slope = production function slope,0,Profit-Maximization,Labor (hours),Coconuts,Production function,24,C*,L*,Isoprofit slope = production function slope i.e. w = MPL,0,Profit-
12、Maximization,Labor (hours),Coconuts,Production function,24,C*,L*,Isoprofit slope = production function slope i.e. w = MPL = 1 MPL = MRPL.,0,Profit-Maximization,Labor (hours),Coconuts,Production function,24,C*,L*,Isoprofit slope = production function slope i.e. w = MPL = 1 MPL = MRPL.,RC gets,0,Profi
13、t-Maximization,Labor (hours),Coconuts,Production function,24,C*,L*,Isoprofit slope = production function slope i.e. w = MPL = 1 MPL = MRPL.,Given w, RCs firms quantity demanded of labor is L*,Labor demand,RC gets,0,Profit-Maximization,Labor (hours),Coconuts,Production function,24,C*,L*,Isoprofit slo
14、pe = production function slope i.e. w = MPL = 1 MPL = MRPL.,Given w, RCs firms quantity demanded of labor is L* and output quantity supplied is C*.,Labor demand,Output supply,RC gets,0,Utility-Maximization,Now consider RC as a consumer endowed with $* who can work for $w per hour. What is RCs most p
15、referred consumption bundle? Budget constraint is,Utility-Maximization,Labor (hours),Coconuts,24,0,Budget constraint,Utility-Maximization,Labor (hours),Coconuts,24,0,Budget constraint; slope = w,Utility-Maximization,Labor (hours),Coconuts,More preferred,24,0,Utility-Maximization,Labor (hours),Coconuts,24,0,Budget constraint; slope = w,Utility-Maximization,Labor (hours),Coconuts,Budget constraint; slope = w,24,0,Utility-Maximization,Labor (hours),Coconuts,24,0,C*,L*,Budget constraint; slope = w,Utili