Econ 303 TA session 2

Wei Dai
2/3/2014

Pareto Efciency Social Planners Problem

1 EXCERCISE : 3 AGENTS
consider a simple pure-exchange economy. There are three innitely lived people, i=1,2,3 in i the economy. Each consumer i values sequences of consumption {c t }t =0 according to u i (c i ) =
i =0 t i i ln(c t )

with0 < 1 < 2 < 3 < 1. The deterministic endowment process for each household is given by
1 ei = 1 for all t 0 2 e i = 1 for all t 0 3 ei = 2 for all t 0

1)Dene the Arrow-Debreu equilibrium for this economy An AD equilibrium is sequences of t } price {p t =0 and )i =1,2,3 } consumption levels {(c t =0 such that
i t } Given {p t =0 , consumer i, i=1,2,3 chooses {c t }t =0 to solve {c t }t =0 t =0

max

t i i ln c t

such that

t =o

i t c t p

t =o

i t e t p

i ct 0

t = 0, 1, 2...

Market clearing condition for all t=1,2,3...

1 2 3 1 2 3 t t t c +c +c = et + et + et (= 4)

t = 0, 1, 2... 2)Dene a Pareto efcient allocation for this economy

i 3 )t =0 } is Pareto efcient if it is feasible and if there is no other feasible allocaAn allocation {(c t i 3 t )t =0 } such that tion {(c

t ) u (c i ) for i=1,2,3 u (c t ) > u (c i ) for at lease one i=1,2,3 u (c

i 3 An allocation {(c t )t =0 } is feasible if i (a)c t 0 for all i=1,2,3 1 2 3 1 2 3 t t t (b)c +c +c = et + et + et (= 4) for all t

3)Solve the Social Planners problem for this model, i.e solve
3
i 3 }t =0 )i =0 i =1 ({c t

max

i u i (c i )

s.t.
3 i =1 i ct = 3 i =1 i et

t 0

4)Find the unique AD equilibrium of this model by solving an appropriate three dimensional system in the three unknowns (1 , 2 , 3 ). Be sure to specify all of the equilibrium elements.