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Lecture 7

# Econ 103 Lecture 7 Jan 28th.doc

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School
Department
Economics
Course
ECON 103
Professor
Iryna Dudnyk
Semester
Winter

Description
Econ 103, Lecture 7 January 28th Chap. 6, Exchange without Production (fixed amount of good available) Ex: -Darlene: MV(D) = 12-0.4 Q(D) -Nelson: MV(N) = 25 - Q(N) -Darlene has a chicken that lays 20 eggs/day Should they trade? Find MV's: -If Darlene eats her 20 eggs: MV(D) = 12 - 0.4 x 20 = 4₵ MV(N) = 25 - 0 = 25₵ ******Check notebook for graph****** ( 1 ) In Equilibrium: -MV(N) = MV(D) => no more gains from trade are possible. -Q(N) + Q(D) = 20 (Eggs available) ^- Total eggs "eaten" -25 - Q(N) = 12 - 0.4Q(D) - Q(N) = 20 - Q(D) -25 - 20 + Q(D) = 12 - 0.4Q(D) -1.4Q(D) = 7 -Q(D) = 5 inefficient (unexploited gains from trade) - Can they gain from trading 16th egg: - for Q(D) = 4 ; MV(D) = 12 - 0.4 x 4 = 10.4 -Q(N) = 16 = 25 - 16 = 9 -If they trade more, => they will lose CS and SS => Equilibrium in this market is efficient. - total gains = CS + SS are maximized. *** skip the box where MV's are put together ***
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