Question
Consider the following general equilibrium model with two competitive goods markets. In market 1, demand and supply are equal to Q D1 = a-bP 1
Consider the following general equilibrium model with two competitive goods markets. In market 1, demand and supply are equal to QD1 = a-bP1 - eP2 and Qs1 = -f + gP1, respectively. In market 2, demand and supply are equal to QD2 = -P1 - P2 and Qs = - + yP2
All parameters are strictly positive. a) Express the equilibrium condition in matrix form. b) Using an echelon matrix, derive the condition under which a unique equilibrium exists. c) Interpret this condition in terms of mathematics. d) Using a graph, illustrate what happens if the condition derived in part b) is violated (there are two cases that you will want to cover).
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