ECON-2006EG Quiz: Coordination Failures and Complementarities
7 Mar 2021
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1: multiple equilibria in a general model, assumption now: many identical firms, cure i( ): own optimal investment as a function of expectations about average investment . Intersections between i( ): and 45-degree line: equilibria (stable) high investment equilibrium (stable) low investment equilibrium (unstable) middle investment equilibrium. If i is larger than , increases till the optimal investment equals the average investment. If both inequalities are satisfied: both equilibria exist. Q=l technology : modern technology equilibrium exists if w is lower than modern. If w line is between modern and traditional line: both equilibria exist. Income of a country have to be large so that firms switch to new technology, otherwise country can be stuck: we can help countries out of inefficient equilibrium by supporting them. It could help countries to open up for international market -> global demand can be higher.
