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by: Arno Leuschke


Arno Leuschke
GPA 3.66


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Class Notes
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This 11 page Class Notes was uploaded by Arno Leuschke on Thursday October 22, 2015. The Class Notes belongs to ECON 122 at University of California Santa Barbara taught by Staff in Fall. Since its upload, it has received 19 views. For similar materials see /class/227161/econ-122-university-of-california-santa-barbara in Economcs at University of California Santa Barbara.




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Date Created: 10/22/15
1162008 Review Review of microeconomics Supplydemand analysis Efficiency of competitive equilibrium Application to sugar quotas in the US Economic efficiency and policy analysis Missing markets externalities and corrective policy Property rights lntertemporal Choice Present value calculations Asset market equilibrium unit P 1162008 S Supply technology factor prices D Demand Preferences prices of related goods income Q k Quantity per month unit 1162008 Consumer surplus Producer Surplus Quantity per month unit P 1162008 U S Sugar Market S Int Q2 Quantity per month Pareto Optimal Allocation An allocation of resources is Pareto Optimal if any reallocation that improves one person s utility necessarily makes someone else worse off 1162008 Pareto Optimality and Competitive Markets Theorem If competitive markets exist to allocate all inputs and outputs that affect individual utilities or profits then the competitive equilibrium with supply demand in each market is Pareto optimal 1162008 unit P k SW DEW Social cost supply curve Sw pr0 Dead Private cost weight supply curve loss f Marginal i D v Qe Q Potato chips Quantity per month Private cost supply curve lies below social cost supply curve because it excludes the opportunity cost of irrigation water from the river pr 1162008 Present Value and Utility Maximization Rule If markets for borrowing and lending exist then utility maximization requires that investment decisions be made to maximize the present value of net payoffs 1162008 Present Value Formulas 1 PV of A received in period t when the interest rate is r per year A1rt with compounding once per year Ae39 where e271 with 39continuous compounding39 2 PV of A received each year forever starting next year PV A1r A1r2 A1r3 A1r4 Ar 3 PV of A is received each year from year 1 next year through year T PV Ar1 11rT 4 PV of A is received at intervals ofT years forever PV A1 11rT 1162008 Asset Market Equilibrium Rule Def of Asset Object that can yield consumption in more than one period Examples house bond 0 reserve forest One period decision Should asset owner hold asset i for an additional year or sell it and invest the proceeds in an alternative asset Pi price of asset i Possible payoffs to holding asset i for one year 1 Consumption flow Ci Examples bond interest housing service utility from art apples from tree 2 Expected capital gainloss dPi Examples 0 reserves works of art apartments may appreciate or depreciate 3 Physical growthdepreciation gi in physical terms giPi in value Examples forest growth gigt 0 apartment house deprec gilt 0 1162008 10 Asset Market Equilibrium Rule cont Total Return from holding asset i Ci dPi giPi Rate of return from holding asset i Ci dPi giPiPi CiPi dPiPi gi Rate of return on alternative asset in the economy r Investor s decision Hold sell asseti if its rate of return is greater less than r Investor is indifferent between holding and selling asset i if CiPi dPiPi gi r Asset market equilibrium condition CiIPi dPiIPi gi r 1162008 11


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