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.