2
$\begingroup$

I'm having trouble understanding how to find the offer curves in general equilibrium. Is there a general way that we can use to find it?

I can understand the Pareto set and contract curve but when it comes to equilibrium I'm stuck.

For ex. if we have two consumers: Consumer 1 has as his initial bundle all of good $2:(0; 10)$ ; while consumer 2 has all of good $1 : (10; 0)$.

Let their utilities be $$u_1= min (x; y)$$ $$u_2= min (4x; 5y)$$

What would be the steps for finding the offer curves? Appreciate any help given.

$\endgroup$
1
$\begingroup$

In the picture below offer curve of individual 1 is given by lines connecting $E$ to $O_1$ and $O_1$ to $O_2$. And offer curve of individual 2 is given by lines connecting $E$ to $O_2$ and $O_2$ to $A$ and $A$ to $O_1$. Set of competitive equilibria are given by the intersection of two offer curves. $p_X = 0$ and $p_Y = 1$ supports allocation at $O_2$ as competitive equilibrium. Allocations on the line segment $O_1A$ are supported by prices $p_X = 1$ and $p_Y = 0$.

$\endgroup$
2
  • $\begingroup$ Thank you for your solution. Could you please suggest to me some literature regarding the offer curves so as to find the general equilibrium? $\endgroup$ – Maybeline Lee Jan 22 at 13:27
  • $\begingroup$ Chapter 15 General Equilibrium of Microeconomic Theory by Mascollel, Whinston and Green $\endgroup$ – Amit Jan 22 at 15:14

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.