ECON 2400 Study Guide - Final Guide: Real Wages, Income Approach, Farad
Document Summary
Answers to sample final: a competitive equilibrium and the social planner"s problem are two different arrangements to allocate resources in an economy. In a competitive equilibrium economic agents are self-interested and aim to maximize their own welfare subject to some constraints. The prices they face signal market conditions, and these prices adjust to regulate equality of supply and demand in each market. For example, consumers maximize utility subject to their budget constraint taking goods and factor prices as given. The social planner is a ficticious entity that does not deal with markets but has complete knowledge and complete command over the economy, facing the same preferences and production constraints that consumers and firms would face. The objective of the planner is to maximize social welfare subject to what is technologically feasible in this economy. The allocation reached by the planner is the socially optimal outcome: it is the best possible allocation for this economy.
