Deck 2: Fundamentals of Welfare Economics

Question 1

Pareto efficient points in the Edgeworth Box are

A)found when indifference curves are tangent.
B)found when one person cannot be made better off without making another person worse off.
C)found when MRS are equal.
D)all of these answers are correct.

Answer 1

all of these answers are correct.

Question 2

There is only one Pareto efficient point on the contract curve.

A)True
B)False
C)Uncertain

Answer 2

False

Question 3

A utility possibilities curve need not incorporate the utility of every individual.

A)True
B)False
C)Uncertain

Answer 3

True

Question 4

Points outside the production possibilities curve are

A)consumer equilibrium points.
B)endowment points.
C)unattainable.
D)producible.

Question 5

Points on the utility possibilities curve are

A)inefficient.
B)not producible.
C)points of incomplete preferences.
D)Pareto efficient.

Question 6

The First Fundamental Theorem of Welfare Economics requires

A)that no one has any market power.
B)producers and consumers to act as perfect competitors.
C)that a market exists for each and every commodity.
D)all of these answers are correct.

Question 7

The Edgeworth Box should

A)never touch the production possibilities curve.
B)lie inside the production possibilities curve.
C)lie completely outside of the production possibilities curve.
D)lie partially inside the production possibilities curve.

Question 8

When the First Fundamental Theorem of Welfare Economics doesn't hold, there is a market failure.

A)True
B)False
C)Uncertain

Question 9

The utility possibilities curve is derived from the contract curve.

A)True
B)False
C)Uncertain

Question 10

A social welfare function

A)can never be derived numerically.
B)is a function that shows that the utilities of society are incorporated into society's well-being.
C)is a function made by the Department of Welfare.
D)all of these answers are correct.

Question 11

A public good is

A)always provided by the government.
B)nonexcludable and nonrival in consumption.
C)excludable and rival in consumption.
D)a good that the public must pay for.

Question 12

Movement from an inefficient allocation to an efficient allocation in the Edgeworth Box will

A)increase the utility of at least one individual, but may decrease the level of utility of another person.
B)decrease the utility of all individuals.
C)increase the utility of one individual, but cannot decrease the utility of any individual.
D)increase the utility of all individuals.

Question 13

An example of an activity that generates an externality is pursuing a graduate degree in economics.

A)True
B)False
C)Uncertain

Question 14

The marginal rate of substitution is

A)the slope of the indifference curve.
B)the slope of the utility possibilities curve.
C)the slope of the contract curve.
D)none of these answers is correct.

Question 15

The absolute value of the slope of the production possibilities curve is the

A)contract curve.
B)marginal rate of transformation.
C)marginal rate of substitution.
D)offer curve.

Question 16

Market failure can occur when

A)individuals can influence prices.
B)a market for a commodity does not exist.
C)some firms have market power.
D)all of these answers are correct.

Question 17

Welfare economics

A)only looks at the poorest parts of the economy.
B)examines the social desirability of alternative economic states.
C)does not depend on market interactions.
D)uses only concepts of efficiency to evaluate the alternatives.

Question 18

The government must intervene in markets in order to move the economy to the welfare maximizing point.

A)True
B)False
C)Uncertain

Question 19

According to the Second Fundamental Theorem of Welfare Economics,

A)society can attain any Pareto efficient allocation of resources.
B)production must be twice as large as consumption.
C)equity cannot be achieved without inhibiting efficiency.
D)not all points along the utility possibilities curve are attainable.

Question 20

Social indifference curves are the same as a social welfare function.

A)True
B)False
C)Uncertain

Question 21

Social welfare functions can be formed in many ways. They can be additive, meaning that the all utilities are added together. They can incorporate the idea of maximin, meaning that the utility of the person with the least is maximized. If you were a central planner for an economy, what type of social welfare function would you create?

Question 22

Why might asymmetric information contribute to the problem of a market failure?

Question 23

Suppose that a competitive firm's marginal cost of producing output q is given by MC = 5 + 2q. Assume that the market price of the firm's product is $27. What level of output will the firm produce?

Question 24

Welfare economics is concerned with individual desirability of alternative economic states.

A)True
B)False
C)Uncertain

Question 25

For Pareto efficiency, the MRT should not equal the MRS of all individuals.

A)True
B)False
C)Uncertain

Question 26

Imagine a simple economy with only two people, Leroy and Percy. If the social welfare function is W = UL + UP, and the utility possibilities curve is UPF = UL + 2UP, what will be the societal optimum?

Question 27

If James has an indifference curve characterized by the function of U = 2X3 Y2, what is his marginal rate of substitution between goods X and Y?

Question 28

Marginal cost is the incremental production cost of one more unit of output.

A)True
B)False
C)Uncertain

Question 29

The contract curve is the collection of points where indifference curves are tangent in the Edgeworth box.

A)True
B)False
C)Uncertain

Question 30

Merit goods

A)should be provided even if there is no demand for them.
B)increase in costs as demand increases.
C)are provided for those who are well behaved and earn them.
D)none of these answers is correct.

Question 31

Merit goods have been discussed towards the end of this chapter. Can concerts and other publicly provided services be rationalized using these ideas?

Question 32

Pareto improvement can be a reallocation of resources that makes more than one person better off.

A)True
B)False
C)Uncertain

Question 33

Consider a simple exchange economy where the marginal rate of transformation between two goods is greater than the marginal rate of substitution for the same goods. Can the Pareto equilibrium be derived?

Question 34

Consider an Edgeworth economy where there are two citizens, Mr. Cortopassi and Ms. Thomas. There are only two goods to be consumed in the economy, Beer and Pretzels. The total amount of Beer is 12 units. The total amount of Pretzels is 12 units. Answer the following: Suppose Mr. Cortopassi has utility for the two goods characterized as UC(B,P)= B + P. Ms. Thomas's utility function is UT(B,P)= B + P. Identify the points that are Pareto efficient.