Deck 10: General Equilibrium and Economic Welfare

Question 1

As opposed to general-equilibrium analysis,partial equilibrium analysis looks

A) at an equilibrium and changes to it in a single, isolated market.
B) at how changes in one market effect other markets.
C) at how equilibrium is determined in all markets simultaneously.
D) at either price or quantity movements.

Answer 1

A

Question 2

Moving away from the contract curve will

A) harm both parties.
B) harm only one of the parties.
C) harm at least one of the parties.
D) harm neither of the parties.

Answer 2

C

Question 3

General-equilibrium analysis is the study of

A) how an equilibrium is determined in all markets simultaneously.
B) how an equilibrium is determined in all closely related markets.
C) the effects of a change in a market, and all spillover effects in all related markets.
D) All of the above.

Answer 3

D

Question 4

When comparing partial-equilibrium effects to general-equilibrium effects,one can conclude that

A) general-equilibrium effects are always larger.
B) partial-equilibrium effects are always larger.
C) the effects are of equal size.
D) one cannot determine before the fact which effect is greater.

Question 5

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Points a and b

A) are most likely to reflect the final endowments after trading.
B) are least likely to reflect the final endowments after trading.
C) are equally likely to reflect the final endowments after trading than other points on the contract curve.
D) are definitely not the final endowments after trading.

Question 6

Joe and Rita each have some cookies and milk.Joe is willing to trade 2 cookies for an additional ounce of milk.Rita is willing to trade four cookies for an additional ounce of milk.If trading is possible,which of the following is most likely to occur?

A) Joe will give some milk to Rita in exchange for cookies.
B) Rita will give some milk to Joe in exchange for cookies.
C) No trade will take place since they both prefer to have more milk and fewer cookies.
D) There is not enough information to make any predictions.

Question 7

If only two people are trading their endowments and no production is possible,then the equilibrium they reach will

A) be on their contract curve.
B) result in unequal marginal rates of substitution for the two people.
C) result in one person being worse off than with his or her endowment.
D) All of the above.

Question 8

Suppose there are only two goods - Food (F)and Shelter (S).The demand equations for these two goods depend on their prices,pF and pS as follows:
DF (pF,pS)= 10 - 2pF - pS
DS (pF,pS)= 10 - pF - 2pS
The supply curves depend only on their own prices:
SF (pF)= pF
SS (pS)= 5pS
Determine the equilibrium price and quantity of these goods.

Question 9

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.If the endowment is at point a and trade is possible,which of the following points are possible equilibria?

A) a and b
B) a and c
C) b and d
D) c and d

Question 10

The general-equilibrium analysis of a minimum wage applied to only some sectors of the economy suggests that

A) workers in all sectors will face increased wages.
B) some workers in the covered sectors will lose their jobs and remain unemployed.
C) some workers originally employed in the covered sectors will move to the uncovered sectors, driving down wages in the uncovered sectors.
D) all workers will be worse off.

Question 11

Joe and Rita each have some milk and cookies (Milk on the horizontal axis).Joe's MRS of cookies for milk is two.Rita's MRS of cookies for milk is four.Which of the following statements is TRUE?

A) No gains from trade are possible.
B) Both Rita and Joe can be made better off if Rita gives Joe some cookies in exchange for milk.
C) Rita and Joe are on the contract curve.
D) Both Rita and Joe can be made better off if Joe gives Rita some cookies in exchange for milk.

Question 12

Gains from trade can only occur when

A) marginal rates of substitutions differ across people.
B) marginal rates of substitution are equal across people.
C) indifference curves are convex.
D) people find themselves on the contract curve.

Question 13

Employing a general-equilibrium approach,describe the effect of a new law that prohibits steel imports.

Question 14

A general-equilibrium analysis of a price change in the corn chip market would include an investigation of the impacts in

A) the television market.
B) the coffee market.
C) the salsa market.
D) All of the above.

Question 15

A general-equilibrium analysis of the impact of a tax on the peanut butter market would include an investigation of the impacts in

A) the television market.
B) the coffee market.
C) the salsa market.
D) the jelly market.

Question 16

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.The contract curve can be found by connecting points

A) a and b.
B) a and c.
C) b and d.
D) c and d.

Question 17

When the U.S.minimum wage was first passed in 1938,only 56% of workers were employed in covered firms.The incomplete coverage suggests that

A) the partial equilibrium ignores the movement of workers from uncovered sectors to covered sectors.
B) the decrease in employment is higher in general-equilibrium analysis.
C) the general-equilibrium analysis suggests the wage in uncovered sectors will fall.
D) all the workers will be worse off in both general- and partial-equilibrium analysis.

Question 18

Suppose that the minimum wage covers all sectors of the economy; however,for unionized laborers,the minimum wage is ineffective.That is,the union wage is already above the minimum wage.Analyze the impact of an increase in the minimum wage on both the unionized and non-unionized labor markets.(Assume that the higher minimum wage is still ineffective in the unionized sector and that union and nonunion labor are substitutable.)

Question 19

The effects of a price change are always understated by a partial-equilibrium analysis when compared to a general-equilibrium analysis.

Question 20

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Considering only the labeled points,point c is a possible equilibrium

A) only if it is the endowment.
B) only if point a is the endowment.
C) if either point a or b is the endowment.
D) only if point d is the endowment.

Question 21

Consider trade between two consumers (1 and 2)and two goods,X and Y.Suppose the total quantities of each good are 100 units.Each consumer has Cobb-Douglas preferences given by:
U(X,Y)= XY
What is the shape of the contract curve,i.e.derive the equation? How does the contract curve change is consumer one has the utility function
U(X,Y)= X²Y
while the other consumer's preferences are as before? Again,derive the equation for the contract curve.

Question 22

If two grade-school children willingly trade their lunches with one another,we can conclude that at least one of them preferred the other's lunch to his own.

Question 23

The above figure depicts the Edgeworth Box for two individuals,Al and Bruce.Point c is Pareto efficient because

A) the MRS's are equal.
B) the indifference curves are tangent.
C) no mutual gains from trade exist.
D) All of the above.

Question 24

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Point a is NOT Pareto efficient because

A) Al's MRS exceeds Bruce's MRS.
B) the point is not near the center of the box.
C) Al's indifference curve is not far enough away from the origin.
D) All of the above.

Question 25

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.If the endowment is at point a,and Al has no ability to bargain,the final allocation will be at point

A) a.
B) b.
C) c.
D) d.

Question 26

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.If the endowment is at point a,and Bruce has no ability to bargain,the final allocation will be at point

A) a.
B) b.
C) c.
D) d.

Question 27

The First Theorem of Welfare Economics can be expressed as

A) the competitive equilibrium results only when no transactions costs exist.
B) the competitive equilibrium does not involve reallocation of endowments.
C) any efficient allocations can be achieved by competition.
D) the competitive equilibrium is efficient.

Question 28

Gains from trade will be possible as long as

A) people have different endowments.
B) people place different values on some goods.
C) marginal rates of substitution are equal across individuals.
D) excess supply equals excess demand.

Question 29

When considering trade of two goods between two people,if one person has all the endowment of both goods this allocation

A) is never on a contract curve.
B) will result in trade so each person has all of one good.
C) will result in trade to a equal division of goods between the two people.
D) is Pareto efficient.

Question 30

Does the contract curve for two traders and two goods always go through the origin (0,0)?

Question 31

Any point on the contract curve is Pareto efficient regardless of the initial endowment.

Question 32

Can it be efficient for one trader to consume all units of the goods while the other trader consumes nothing? In other words,does this point lie on the contract curve?

Question 33

Explain why having different marginal rates of substitution is necessary for trade to occur.

Question 34

Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 20 units of clothing but no food.Suppose each has the utility function U = F ∗ C.Derive the contract curve.

Question 35

The assumptions about tastes and behavior to model the trading between two people do NOT include

A) utility maximization.
B) convex indifference curves.
C) nonsatiation.
D) interdependence.

Question 36

When two people trade their initial endowments to a point on the contract curve,only the level of the endowments will determine the new allocation.

Question 37

Gains from trade will be possible as long as

A) levels of utility differ.
B) utility functions differ.
C) marginal rates of substitution differ.
D) endowments differ.

Question 38

Robinson starts out with 10 lobsters and five coconuts.Friday starts out with 10 lobsters and 15 coconuts.After trading,Robinson ends up with eight lobsters and 10 coconuts.Robinson feels neither better nor worse off than when he started but cannot get Friday to agree to any more trades.Friday feels better off than when he started.Draw the Edgeworth box consistent with this story.

Question 39

When two people are on the contract curve,the allocation of goods

A) cannot be improved.
B) is pareto efficient.
C) is such that neither individual can be made better off without making the other worse off.
D) All of the above.

Question 40

Andrew and Sarah are two traders in a pure exchange economy with two goods,Bikes and TVs.Suppose Andrew has preferences given by:
U(B,T)= BT
where B is the number of bikes and T is the number of TVs.Sarah only derives utility from TV,so her utility function can be given by:
V(B,T)= T
Describe the contract curve.

Question 41

In a competitive marketplace,prices adjust until

A) MRS's are equal to zero.
B) excess supply equals excess demand equals zero in all markets.
C) each consumer has maximized utility subject to his budget constraint.
D) all firms earn zero profit.

Question 42

Any competitive equilibrium is Pareto efficient because with a competitive equilibrium,

A) the marginal rates of substitution are equal for all consumers.
B) the price line is the contract curve.
C) mutual gains from trade exist.
D) the slope of the price line equals the ratio of the MRS for all consumers.

Question 43

Explain why Robin Hood's practice of stealing from the rich to give to the poor is never Pareto efficient.

Question 44

The fact that any pareto efficient equilibrium can be achieved through competition by adjusting endowments is called

A) the second welfare theorem.
B) the first welfare theorem.
C) the third welfare theorem.
D) That is not possible.

Question 45

A competitive equilibrium is Pareto efficient because at the competitive equilibrium,

A) prices have been allowed to adjust.
B) there are no further gains from trade.
C) the final outcome is different from the original inefficient endowment.
D) all members of society can be made better off.

Question 46

Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 40 units of clothing but no food.Suppose each has the utility function U = F ∗ C.The price of clothing is always $1.What is the competitive equilibrium price for food?

A) $5
B) $4
C) $3
D) $2

Question 47

A competitive equilibrium is not Pareto efficient if some members of society are unable to afford a necessary good.

Question 48

There are two consumers in the market,Jack and Jane.Each have some coffee and candies (coffee on the horizontal axis).Jack's MRS of candies for coffee is 3.Jane's MRS of candies for coffee is 3.Which one of the following statements is incorrect?

A) This allocation is on the contract curve.
B) This can be a competitive equilibrium.
C) This allocation is Pareto efficient.
D) We can reallocate goods so as to make one person better off without harming another.

Question 49

Consider a two-trader/two-good exchange economy in equilibrium.If the endowment point moves to the north east,i.e.the endowment quantities to one of the consumers increase,can we determine the direction in which the equilibrium quantities will change? Demonstrate your answer with a graph including the relevant indifference curves,contract curve and price line.

Question 50

A competitive equilibrium is Pareto efficient because at the competitive equilibrium,

A) prices reflect the differences in marginal rates of substitution across individuals.
B) there are no further gains from trade.
C) there is an equal distribution of the goods.
D) everyone has the same level of utility.

Question 51

Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 40 units of clothing but no food.Suppose each has the utility function U = F¹/²ᶜ¹/².If the price of clothing is always $1,and the food price is currently $3,then we can conclude

A) the market is at a competitive equilibrium.
B) the price of food will drop towards a competitive equilibrium.
C) the price of food will increase towards a competitive equilibrium.
D) None of the above.

Question 52

An initial allocation of goods is called a(n)

A) endowment.
B) inheritance.
C) pareto set.
D) general-equilibrium goods set.

Question 53

The fact that at the competitive equilibrium nobody can be made better off without making someone else worse off implies that

A) the equilibrium is pareto efficient.
B) the equilibrium is not pareto efficient.
C) the prices need to adjust further.
D) further gains from trade are possible.

Question 54

Consider a society consisting of just a farmer and a tailor.The farmer has 30 units of food but no clothing.The tailor has 60 units of clothing but no food.Suppose each has the utility function U = F¹/³ᶜ²/³.If the price of clothing is always $1,and the food price is currently $1,then we can conclude

A) the market is at a competitive equilibrium.
B) the price of food will drop towards a competitive equilibrium.
C) the price of food will increase towards a competitive equilibrium.
D) None of the above.

Question 55

Assume a government likes a particular equilibrium along the contract curve.It can achieve that equilibrium through competition and income redistribution.

Question 56

Explain the logic behind the First Theorem of Welfare Economics.

Question 57

In a competitive market,prices adjust until all consumers find themselves

A) maximizing utility.
B) on the contract curve.
C) happy with their original endowment.
D) with many opportunities to gain from additional exchange.

Question 58

For a given set of prices,two consumers choose bundles that are off the contract curve.In a competitive market,

A) prices will adjust until the consumers choose bundles that are on the contract curve.
B) the indifference curves will shift back to the contract curve.
C) the contract curve will shift to connect these bundles.
D) no adjustments need to be made.

Question 59

According to the Fundamental Theorems of Welfare Economics,the competitive equilibrium is dependent on the relative bargaining powers of the parties trading.

Question 60

The competitive equilibrium determines the absolute prices of each of the goods based on the endowments and marginal rates of substitution.

Question 61

Every point on the joint production possibilities frontier represents

A) an initial endowment.
B) inefficient production.
C) the marginal rate of substitution of goods for each producer.
D) at least one producer specializing in production.

Question 62

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier has a vertical intercept of

A) 10.
B) 20.
C) 30.
D) 50.

Question 63

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier has a kink because

A) each country has a constant marginal rate of transformation that differs from the other country.
B) each country has a marginal rate of transformation that varies with the product mix.
C) all production possibility frontiers have kinks.
D) the two countries have the same marginal rate of transformation.

Question 64

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier will have a slope of -1

A) only when 20-30 units of food are produced.
B) only when 10-20 units of food are produced.
C) only when 10-20 units of clothing are produced.
D) throughout the entire PPF.

Question 65

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.The U.S.has a comparative advantage in producing

A) food.
B) clothing.
C) food and clothing.
D) neither good.

Question 66

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Free trade between these two countries will take place

A) as long as Canada is willing to give up 0.25 unit of clothing to get a unit of food.
B) as long as USA asks for at least 1.5 units of clothing in exchange for a unit of food.
C) as long as Canada asks for at least 3 units of food in exchange for a unit of clothing.
D) as long as USA is willing to give up at least 1.5 units of food in exchange for a unit of clothing.

Question 67

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier

A) will have a slope of -3/4 over the entire frontier.
B) will have a slope of -2 when less than 20 units of food are produced.
C) will have a slope of -1 when less than 20 units of food are produced.
D) will have a slope of -1/2 when less than 20 units of food are produced.

Question 68

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier has a horizontal intercept of

A) 10.
B) 20.
C) 30.
D) 50.

Question 69

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier

A) will kink away from the origin at 20 units of food.
B) will kink toward the origin at 20 units of food.
C) will kink toward the origin at 10 units of food.
D) will kink away from the origin at 10 units of food.

Question 70

Sarah and Andrew are two traders in a pure exchange economic with two goods,Bikes (B)and Computers (C).Sarah's preferences are described by the Cobb-Douglas Utility function:
US = BS¹/³ᶜS²/³
Andrew's preferences are given by:
UA = BA¹/²ᶜA¹/²
Assume the price of Bikes is 1 and the price of computers is p.The initial endowments are BA = 10,BS = 20,CA = 20 and CS = 10.Solve for the competitive equilibrium prices (relative prices)and quantities.

Question 71

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Once free trade is allowed,Canada will produce

A) no clothing.
B) 10 units of clothing.
C) 20 units of clothing.
D) 5 units of clothing.

Question 72

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.If production occurs at the kink on the joint production possibility frontier,

A) the U.S. will specialize in food and Canada will specialize in clothing.
B) the U.S. will specialize in clothing and Canada will specialize in food.
C) each country will devote half of its resources to each industry.
D) joint output is minimized.

Question 73

The ability to produce a good at a lower opportunity cost than someone else is called

A) competitive production.
B) comparative advantage.
C) selective advantage.
D) absolute advantage.

Question 74

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Assuming free trade between these two countries,Canada will produce food

A) as long as any positive amount of food is demanded.
B) as long as more than 10 units of food are demanded.
C) as long as people are willing to give up at least 1 unit of clothing to get a unit of food.
D) as long as people are willing to give up more than 1/2 a unit of clothing to get a unit of food.

Question 75

Competition results in the efficient product mix because

A) producers are setting MRT equal to minus the price ratio while consumers are setting MRS equal to minus the price ratio ensuring that MRT will equal MRS.
B) consumers are on the contract curve.
C) the slope of the production possibility frontier will equal the slope of the contract curve.
D) the distribution of the final output is Pareto efficient.

Question 76

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Suppose each country is in competitive equilibrium prior to free trade being allowed.Once free trade is allowed,the price of food will be

A) two times the price of clothing.
B) equal to the price of clothing.
C) one-half the price of clothing.
D) somewhere between one-half the price of clothing and the price of clothing, depending upon the relative bargaining power of the two countries.

Question 77

If pizza is measured on the horizontal axis and pretzels are measured on the vertical axis,the slope of the production possibility frontier at a given combination reflects

A) the total cost of producing that combination.
B) the total cost of producing that quantity of pizza in terms of pretzels.
C) the cost of making the last pizza in terms of pretzels.
D) the cost of making the last pretzel in terms of pizza.

Question 78

The above figure depicts the Edgeworth box for two consumers,Al and Bruce.Explain why point "a" cannot be a competitive equilibrium.

Question 79

Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 20 units of clothing but no food.Suppose each has the utility function U = F ∗ C.The price of clothing is always $1.If the price of food is $3,does a competitive equilibrium exist? If not,what will happen to the price of food?

Question 80

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Assuming that consumers place equal value on both of these goods and that free trade between these two countries is possible,gains from trade

A) are not possible.
B) exist because food is more expensive to produce in Canada than in the U.S.
C) exist because food is more expensive to produce in the U.S. than in Canada.
D) do not exist because the consumers in each country have set their marginal rate of substitution equal to their country's marginal rate of transformation.