Applied General Equilibrium by Manuel Alejandro Cardenete Ana-Isabel Guerra & Ferran Sancho

Author:Manuel Alejandro Cardenete, Ana-Isabel Guerra & Ferran Sancho
Language: eng
Format: epub
Publisher: Springer Berlin Heidelberg, Berlin, Heidelberg

(5.15)

Similarly, we can also distinguish now production prices from consumption prices. Given the fixed coefficients technology B, any 1 × N vector of production prices p is converted into a 1 × M vector q of consumption prices by

(5.16)

The consumer’s optimization problem (3.1) is straightforwardly redefined. The argument of a representative households utility function is now a M dimensional vector of consumption goods, whereas the budget constraint is defined, for a given vector of factor endowments, by the consumption price vector q and the factors price vector ω. The individual demand function can be written as c h (q, ω), with market demand CD(q, ω) being as usual the aggregation of all consumers’ individuals demands. Final consumption demand for production goods is obtained using (5.15) as B ⋅ CD(q, ω). Notice that all actual production takes place only in the production sectors and the matrix B is just a convenient mapping for reconciling different commodity aggregations. If no such a distinction existed, B would reduce to the identity matrix and we would be back to any of the versions of the standard general equilibrium system.

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