ECO 2102: Assignment 0
Since you are enrolled in a game theory course, there is no better way to start
than by playing a game. Please play the game involving the shapist polygons
available in the link below:
[Link]
This game is based on Nobel laureate Thomas Schelling’s famous paper, “Dy-
namic models of segregation.”
After playing the game, reflect on what you learned from the exercise. In
particular, as neophyte economists and social scientists trying to analyze the
economic and socio-political world, reflect on the following:
1. What does this exercise teach you about an “economic model” and its
role in analyzing any economic or socio-political phenomenon? While
you are at it, reflect on the following words of the famous economist
Ariel Rubinstein:1
“As economic theorists, we organize our thoughts using what we call
models. The word ‘model’ sounds more scientific than ‘fable’ or ‘fairy
tale’ although I do not see much difference between them. The author of
a fable draws a parallel to a situation in real life. He has some moral he
wishes to impart to the reader. The fable is an imaginary situation that
is somewhere between fantasy and reality. Any fable can be dismissed
as being unrealistic or simplistic, but this is also the fable’s advantage.
Being something between fantasy and reality, a fable is free of extraneous
details and annoying diversions. In this unencumbered state, we can
clearly discern what cannot always be seen in the real world. On our
1
“Dilemmas of an economic theorist.” Econometrica, Vol. 74, No. 4 (July, 2006)
1
return to reality, we are in possession of some sound advice or a relevant
argument that can be used in the real world.
We do exactly the same thing in economic theory. A good model in
economic theory, like a good fable, identifies a number of themes and
elucidates them. We perform thought exercises that are only loosely
connected to reality and that have been stripped of most of their real-life
characteristics. However, in a good model, as in a good fable, something
significant remains.”
2. From analyzing the problem of the shapist polygons, did you draw any
learnings about the characteristics that any methodology trying to ana-
lyze features of the economic or socio-political world must possess? In
particular, reflect on how such a methodology brings together individual
desires or preferences, the consequence of these for aggregate outcomes,
and the interplay between the two. Is there a word you are familiar with
that economists typically use to capture this interplay?
3. Finally, solve the following question about a pure exchange economy
you encountered in Micro 1. How does your analysis in this question
connect with the methodology you reflected on in part 2 above?
Consider a pure exchange economy with two individuals, Jemimah (J)
and Smriti (S), and two goods, ice cream (x) and Nutella (y).2 Both
Jemimah and Smriti have identical preferences over these goods and
these are represented by a Cobb-Douglas utility function:
uh (x, y) = x0.5 y 0.5, for h = J, S
Jemimah is initially endowed with one unit of ice cream and zero units
of Nutella, denote this bundle by (1, 0). On the other hand Smriti is
endowed with one unit of Nutella and zero units of ice cream, denote
this bundle by (0, 1). Assume that both goods are fully divisible.
2
As you may know, this kind of an economy is often referred to as as Edgeworth economy.
2
• What is the set of Pareto efficient allocations of this economy?
Suppose Jemimah and Smriti could trade through competitive markets.
• What is the general competitive (aka Walrasian) equilibrium of
this economy?
• Does the conclusion of the first welfare theorem hold for this econ-
omy?