The Basic Model
The Basic Model
Here we present our “Basic Model,” a simple two-good buy-sell strategic market game economy upon which all others in the book are based. The model uses a storable consumable money, and we begin with some comments regarding this kind of money. The model itself has two types of trader, with a continuum of each type. Traders of Type 1 are endowed with money and good #1; traders of Type 2 with money and good #2. Each trader solves her own utility maximization problem, with square root utility function and one “cash flow” constraint. The amount of cash the traders start with determines whether or not they solve their optimizations with the constraint holding loosely and attaining efficient trade, or alternatively the constraint holding tightly and trade inefficient. This allows us to define precisely the concepts of “enough money” and “not enough money” (as well as “enough money well-distributed” and “enough money badly-distributed”) in the economy. We completely analytically solve the model for its equilibria, and provide a sensitivity analysis examining what happens to prices, trade, and consumption as m (the amount of cash endowed collectively to each trader type) ranges from infinity down to zero.
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