Some of the general equilibrium models in this book can be reinterpreted as partial equilibrium models that employ the notion of a representative firm, and that generalize the preference and technology specifications of Lucas and Prescott (1971). The idea is that there is a large number of identical firms that produce the same goods and sell them in competitive markets. Because they are identical, we carry along only one of these firms, and let it produce the entire output in the industry. But we have to be careful in our analysis because this representative firm's decisions play two very different roles: as a stand-in for the “average” competitive producer, and as producer of the entire industry's output. In posing its optimum problem, we want the firm to act as a price-taking competitor. This chapter first describes the links between our earlier general equilibrium formulation and a partial equilibrium. It then provides examples of models that conform to our framework models, including models of markets for housing, cattle, and occupational choice.
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