Deck 6: Exchange, Efficiency, and Prices

Question 1

Which of the following must be true for voluntary exchange to be mutually beneficial?

A)The parties to the exchange do not cheat
B)The presence of a middleman
C)The use of currency for exchange
D)All individuals are risk averse

Answer 1

A

Question 2

Suppose,given their initial endowments of milk [M] and cookies [C],we know that: Ashley's marginal rate of substitution of cookies for milk [MRS_CM] = 3M/1C;Bill's MRS_CM = 8M/8C;and Carol's MRS_CM = 5M/10C.Given this information we know that a mutually beneficial trade would involve Ashley selling ______ to Carol and Bill selling ______ to Ashley.

A)milk;cookies
B)milk;milk
C)cookies;milk
D)cookies;cookies

Answer 2

C

Question 3

An endowment refers to _____.

A)a set of property rights
B)a diversified portfolio
C)an initial distribution of goods
D)a set of least-cost production possibilities

Answer 3

C

Question 4

Assume that Jeff and Jane both consume only two goods,burgers and soft drinks.Jeff is willing to trade three soft drinks for one more burger,while Jane is willing to trade only two soft drinks for one more burger.Under these conditions:

A)Jeff should trade soft drinks for burgers.
B)Jeff would be willing to trade,but Jane would not.
C)Jeff should trade burgers for soft drinks.
D)Jane would be willing to trade,but Jeff would not.

Question 5

Suppose,given their initial endowments of milk [M] and cookies [C],you know that Ashley's marginal rate of substitution of cookies for milk [MRS_CM] = 3M/1C,Bill's MRS_CM = 8M/8C,and Carol's MRS_CM = 5M/10C.Given this information,a mutually beneficial trade:

A)cannot not exist between the three individuals.
B)would involve Ashley and Bill selling cookies to Carol.
C)would involve Ashley and Bill selling milk to Carol.
D)would involve Carol selling milk to Ashley and cookies to Bill.

Question 6

Suppose,given their initial endowments of milk [M] and cookies [C],we know that Ashley's marginal rate of substitution of cookies for milk [MRS_CM] = 3M/6C,Bill's MRS_CM = 8M/8C,and Carol's MRS_CM = 5M/10C.Given this information we know that a mutually beneficial trade does not exist between:

A)Ashley and Carol or between Ashley and Bill.
B)Ashley and Bill,but it does exist between Ashley and Carol.
C)Ashley and Carol,but it does exist between Carol and Bill.
D)any of the three individuals.

Question 7

Figure 6-1 shows the distribution of steak and wine between Monica and Hank.
Figure 6-1
ref SHAPE \* MERGEFORMAT
At point A in Figure 6-1,Monica's endowment of steak and wine is _____,respectively.

A)O_HZ and O_MS
B)FG and ZV
C)O_MS and O_MV
D)O_HF and ZV

Question 8

What are the dimensions of the Edgeworth box if Frank's endowment is 15 hamburgers and 20 soft drinks per month and Linda's endowment is 12 hamburgers and 25 soft drinks?

A)27 hamburgers and 45 soft drinks
B)15 hamburgers and 20 soft drinks
C)15 hamburgers and 25 soft drinks
D)35 hamburgers and 37 soft drinks

Question 9

Suppose,given their initial endowments of milk [M] and cookies [C],we know that: Ashley's marginal rate of substitution of cookies for milk [MRS_CM] = 3M/1C;Bill's MRS_CM = 8M/8C;and Carol's MRS_CM = 5M/10C.Given this information we know that a mutually beneficial trade would involve Carol selling _____ to Bill and Ashley selling _____ to Bill.

A)milk;cookies
B)milk;milk
C)cookies;milk
D)cookies;cookies

Question 10

Qualifications to the tenet that voluntary exchange is mutually beneficial include the criterion that _____.

A)the individual's preferences will not change during the transaction
B)the outcome of the exchange must be equitable as well as efficient
C)one individual is made better off at the expense of the other
D)benefit is evaluated after the transaction

Question 11

At their current distributions,Andrew's marginal rate of substitution of hamburgers for fish sticks is 6 while Betty's is 2.Both Andrew and Betty could be made better off if:

A)they do not trade and keep their present allotment of hamburger and fish sticks.
B)Andrew trades between two and six of his allotment of hamburgers with Betty for a fish stick.
C)Andrew trades between two and six of his allotment of fish sticks with Betty for a hamburger.
D)Andrew gives all of his hamburgers to Betty for all of her fish sticks.

Question 12

If the MRS at an initial market basket between books [B] and Frisbees [F] is 6B/1F for Dave and 3B/1F for Diane,then:

A)Diane will accept 3 books from Dave for 1 Frisbee.
B)Diane will accept 2 books from Dave for 1 Frisbee.
C)mutually beneficial trades are not possible.
D)Dave will offer 7 books for 1 Frisbee from Diane.

Question 13

If the MRS at an initial market basket between books [B] and Frisbees [F] is 6B/1F for Dave and 3B/1F for Diane,then:

A)mutually beneficial trades are not possible.
B)Diane will accept 4 books from Dave.
C)Diane will accept 2 books from Dave.
D)Dave will accept 2 Frisbees from Diane.

Question 14

From the information in Table 6.1,you can conclude that MRS_PC is:

A)constant for Jane but not for Bill
B)constant for both Jane and Bill
C)constant for Bill but not for Jane
D)not constant for both Jane and Bill

Question 15

In Table 6.1,if initially Jane has basket B and Bill has basket D,then we can conclude that a mutually beneficial trade _____.

A)does not exist
B)requires that Jane sell Pizza and Bill sell Coke
C)requires that Jane sell either Coke or Pizza
D)requires that Jane sell Coke and Bill sell Pizza

Question 16

The vertical and horizontal dimensions of an Edgeworth box diagram are determined by:

A)the division of commodities between two consumers.
B)the total quantities of the two commodities in question.
C)the initial endowments of two commodities among two individuals.
D)the willingness of consumers to exchange.

Question 17

When the marginal rates of substitution [MRSs] for a given distribution of goods differ for two parties,which of the following is incorrect?

A)Mutually beneficial trade is possible.
B)Indifference curves are intersecting.
C)The efficient outcome is unique.
D)Trade can make at least one party better off.

Question 18

Given an Edgeworth exchange box showing Homer's and Sandy's endowments of donuts and coffee:

A)for Homer to have more coffee Sandy must have less donuts.
B)if Sandy is on the contract curve Homer must be off the contract curve.
C)Homer and Sandy will be equally well off at any point on the contract curve.
D)for Sandy to have more coffee Homer must have less coffee.

Question 19

Exchange is mutually beneficial when it is _____.

A)between poor economies
B)voluntary
C)controlled by the government
D)ethical

Question 20

In Table 6.1,if initially Jane has basket D and Bill has basket A,then we can conclude that a mutually beneficial trade _____.

A)does not exist
B)requires that Jane sell Pizza and Bill sell Coke
C)requires that Jane sell either Coke or Pizza
D)requires that Jane sell Coke and Bill sell Pizza

Question 21

Trade between two consumers will continue until it is no longer mutually beneficial.This does not imply that the final outcome will be a unique equilibrium because _____.

A)the exchange is not competitive
B)the consumers are both price takers
C)the Pareto optimality condition is not satisfied
D)the marginal rates of substitution differ for both consumers

Question 22

When the marginal rates of substitution for two consumers differ:

A)the consumers' indifference curves are tangent.
B)consumers will exchange goods and can end up anywhere inside the area bounded by their indifference curves.
C)consumers will exchange goods and will end up on the contract curve inside the area bounded by their indifference curves.
D)consumers will exchange goods and will end up on the contract curve,but not necessarily inside the area bounded by their indifference curves.

Question 23

Assume that Bill and Terry consume two goods,X and Y,so that their marginal rates of substitution are equal.Under these conditions we can conclude that:

A)any trade between Bill and Terry will be mutually beneficial.
B)trade can benefit Bill but not affect Terry.
C)there can be no mutually beneficial trades.
D)the potential to trade would depend on Bill's and Terry's bargaining skills.

Question 24

Figure 6-2 shows an Edgeworth box with the preferences of Kathy and Tom toward bread and candy.
Figure 6-2
Refer to the Edgeworth box in Figure 6-2.Which of the following statements is true?

A)Point A is more efficient than point E.
B)Point E is more efficient than point C.
C)Point C is more efficient than point B.
D)Point B is more efficient than point A.

Question 25

If through prior trade,the marginal rates of substitution for two goods between two people are equal,we say that the last trade:

A)made one person better off and the other worse off.
B)was Pareto optimal.
C)was Edgeworth final.
D)was inefficient.

Question 26

Figure 6-1 shows the distribution of steak and wine between Monica and Hank.
Figure 6-1
ref SHAPE \* MERGEFORMAT
A movement from A to J in Figure 6-1 would:

A)make both Hank and Monica better off.
B)benefit Monica but harm Hank.
C)benefit Monica and leave Hank no worse off.
D)benefit Hank and leave Monica no worse off.

Question 27

If Frank's and Jan's indifference curves intersect at the endowment point A,then:

A)A is on the contract curve.
B)trade will make one of them better off while making the other one worse off.
C)both indifference curves would cross the contract curve before they intersected again.
D)A can be on either Frank's or Jan's contract curve but not both.

Question 28

Figure 6-2 shows an Edgeworth box with the preferences of Kathy and Tom toward bread and candy.
Figure 6-2
In Figure 6-2,a movement from D to B will:

A)harm Tim and benefit Kathy.
B)harm both Tim and Kathy.
C)benefit Tim and harm Kathy.
D)benefit both Tim and Kathy.

Question 29

Figure 6-1 shows the distribution of steak and wine between Monica and Hank.
Figure 6-1
ref SHAPE \* MERGEFORMAT
In Figure 6-1,a movement from J to K:

A)is ideal because the steak and wine are more equally divided between Hank and Monica.
B)is preferred to a move from J to H.
C)benefits Hank and harms Monica.
D)harms both Hank and Monica.

Question 30

In an Edgeworth exchange box diagram,if the two consumers' indifference curves intersect at point A,then:

A)point A is on the contract curve.
B)the consumers' MRSs' differ.
C)voluntary exchange will not change the distribution of goods between consumers.
D)the contract curve is convex to the origin.

Question 31

Figure 6-2 shows an Edgeworth box with the preferences of Kathy and Tom toward bread and candy.
Figure 6-2
A distribution of goods between Jack and Jill is efficient when:

A)Jack can be made better off without harming Jill.
B)neither Jack nor Jill can be made better off without reducing total utility.
C)Jill can be made better off without harming Jack.
D)both Jack and Jill can be made better off without reducing total utility.

Question 32

When the marginal rates of substitution for two consumers differ:

A)the indifference curves of the consumers are tangent.
B)mutually beneficial trade cannot take place.
C)consumers' bargaining skills will determine their position on the contract curve.
D)trade will benefit one of the consumers and harm the other consumer.

Question 33

Economic efficiency is sometimes referred to as _____.

A)social welfare
B)Pareto optimality
C)equity
D)relative efficiency

Question 34

Which of the following is true of the contract curve?

A)The contract curve is an enforceable agreement between parties to an exchange.
B)The contract curve designates the potential trade possibilities along an indifference curve.
C)The contract curve delineates all Pareto efficient allocations in an Edgeworth box.
D)The contract curve defines the equitable exchanges anywhere in an Edgeworth box.

Question 35

At their present allocation of hot chocolate and marshmallows,Tom's marginal utility from hot chocolate is 10 and for marshmallows it's 2,while Cara's marginal utility is 4 and 12,respectively.How can Tom and Cara make each other better off?

A)Tom can consume six more marshmallows so that his marginal utility equals that of Cara.
B)Cara can provide Tom some of both hot chocolate and marshmallows in order to equalize their marginal values for both goods.
C)Tom can trade some hot chocolate with Cara in exchange for some marshmallows.
D)Tom can trade marshmallows with Cara for some hot chocolate.

Question 36

Suppose Jen and Mike have initial distributions of movie theater passes and gallons of gas such that Jen's marginal utility of movie passes and gasoline are both 5,while Mike's marginal utility of movie passes and gasoline are 8 and 1 respectively.If movie theater passes are $9 each and gasoline is $3 per gallon,which of the following should occur?

A)Jen should trade gasoline for movie passes until her marginal utilities for both are 3 and 1 respectively.
B)Mike should trade movie passes for gallons of gasoline until his marginal utilities for each is 2 and 3 respectively.
C)Mike should trade gasoline to Jen for movie passes until the marginal utilities of both goods are the same between the two of them,and their marginal rates of substitution of movie passes for gasoline are both equal to 3.
D)Mike should trade gasoline to Jen for movie passes until the marginal utility of gasoline for each is three times the marginal utility of movie passes for each.

Question 37

When the marginal rates of substitution differ for two consumers:

A)indifference curves are tangent.
B)mutually beneficial trade is possible.
C)multiple prices for goods emerge.
D)the consumer with steeper indifference curves is happier.

Question 38

When the marginal rates of substitution differ,then:

A)mutually beneficial trade is not possible.
B)the only way to make one consumer better off is to make the other worse off.
C)it is impossible to find a point that makes both worse off.
D)indifference curves intersect inside the Edgeworth box.

Question 39

Figure 6-2 shows an Edgeworth box with the preferences of Kathy and Tom toward bread and candy.
Figure 6-2
In Figure 6-2,a movement from D to A will:

A)benefit Tim but not affect Kathy.
B)harm Tim but benefit Kathy.
C)benefit Tim but harm Kathy.
D)not affect Tim but benefit Kathy.

Question 40

Figure 6-1 shows the distribution of steak and wine between Monica and Hank.
Figure 6-1
ref SHAPE \* MERGEFORMAT
Regarding the distribution of steak and wine in Figure 6-1,it is correct to say that:

A)at A,the marginal rates of substitution [MRSs] between steak and wine differ for Hank and Monica.
B)at A,Hank and Monica will engage in further trade which will eventually make one of them worse off.
C)at H,Monica is better off at Hank's expense.
D)trade between Monica and Hank will eventually lead them to the unique efficient outcome K.

Question 41

Figure 6-2 shows an Edgeworth box with the preferences of Kathy and Tom toward bread and candy.
Figure 6-2
Refer to Figure 6-2.Relative to point D,Tim's marginal rate of substitution of cookies for milk [MRS_CB] at point C is _____.

A)indeterminate
B)0
C)the same as at point D
D)larger,smaller,or the same as at point D

Question 42

Two goods are said to be allocated efficiently between consumers when _____.

A)both goods give the consumers the same total utility
B)there are no trades that will make one of the consumers strictly worse off
C)one consumer is as well off as possible,given the utility of the other consumer
D)both the consumers are maximizing utility

Question 43

In an Edgeworth Box diagram,showing the distribution of two goods among two individuals:

A)there is one unique efficient point.
B)there are many possible efficient points.
C)if trade occurs among points along the contract curve it will leave both individuals better off.
D)every point of intersection between the two individuals' indifference curves is efficient.

Question 44

A Pareto optimal distribution of goods is _____.

A)always efficient and equitable
B)efficient but not always equitable
C)not always efficient but equitable
D)neither efficient nor inequitable

Question 45

Figure 6-2 shows an Edgeworth box with the preferences of Kathy and Tom toward bread and candy.
Figure 6-2
At point C in Figure 6-2,which of the following is true of the comparison between Tim's marginal ate of substitution of candy for bread [MRS_CB] and Kathy's MRS_CB?

A)Tim's MRS_CB is greater than Kathy's MRS_CB.
B)Tim's MRS_CB is smaller than Kathy's MRS_CB.
C)Tim's MRS_CB is equal to Kathy's MRS_CB.
D)Tim's MRS_CB is zero and Kathy's MRS_CB is positive.

Question 46

Which of the following is true of an efficient distribution of two goods among two individuals?

A)The efficient distribution of goods is represented by a point off the contract curve.
B)The individuals' marginal rates of substitution are not equal at an efficient distribution of goods.
C)If the distribution of two goods is efficient,one person can be made better off without harming the other.
D)The point of tangency between two indifference curves shows an efficient distribution of goods.

Question 47

The initial endowment of goods:

A)has no effect on the equity of the final outcome.
B)does not affect the relative importance of the goods to each consumer.
C)determines the unique outcome of exchange between the two consumers.
D)affects the final distribution of goods along a contract curve.

Question 48

Which of the following is true of the contract curve?

A)All points on the contract curve are potential points of equilibrium but not all are efficient.
B)All points on the contract curve are potential points of equilibrium and are efficient.
C)A movement from one point on the contract curve to another reduces total welfare.
D)The midpoint of the contract curve is the most efficient point because it is the most equitable.

Question 49

Along the contract curve _____.

A)every point is equitable
B)two individuals have equal marginal rates of substitution
C)any trade that benefits one person will necessarily benefit the other
D)indifference curves of consumers are intersecting

Question 50

Which of the following is true of price taking firms?

A)They cannot affect price by haggling
B)They face an inelastic demand curve
C)They are also price takers in the input market
D)They can not affect the market supply of a good

Question 51

Which of the following statements about the contract curve is correct?

A)The slope of the contract curve reflects the relative prices of the goods to consumers.
B)All points on the contract curve are efficient.
C)A point below the contract curve is always preferred to a point above the curve.
D)A point on the contract curve shows inequitable allocation of resources.

Question 52

Figure 6-1 shows the distribution of steak and wine between Monica and Hank.
Figure 6-1
ref SHAPE \* MERGEFORMAT
In Figure 6-1,points on the contract curve would include _____.

A)A and J
B)J and K
C)H and A
D)K and L

Question 53

Figure 6-2 shows an Edgeworth box with the preferences of Kathy and Tom toward bread and candy.
Figure 6-2
In an Edgeworth box diagram,which of the following statements is incorrect?

A)A point of tangency between two indifference curves identifies the uniquely best distribution of goods between consumers.
B)It is possible to move from an inefficient point to an efficient point in a way that makes one consumer better off and the other no worse off.
C)Some inefficient distributions of the good may be preferred to some efficient distributions on equity grounds.
D)It is possible to move from a point off the contract curve to a point on the contract curve and make both consumers better off.

Question 54

Two goods are allocated inefficiently between consumers when _____.

A)both consumers will lose from any further trades
B)it is impossible to make further trades and increase welfare
C)further trade will make one consumer worse off and not affect the other
D)welfare of both consumer can be increased with further trade

Question 55

Which of the following is the best example of a price taker market?

A)Gasoline retailers in a large suburban area
B)Residential real estate in a rural area
C)Passenger automobiles
D)Computer games

Question 56

Why is it difficult to compare two efficient points and decide which one is better?

A)The Pareto efficiency criterion cannot be applied to more than one allocation.
B)Interpersonal comparisons cannot be made scientifically.
C)The criteria for efficiency are subjective.
D)There is no difference between various efficient allocations.

Question 57

How does a competitive exchange differ from a two-person model of exchange?

A)The Pareto criterion is satisfied only in a competitive exchange and not in a two-person exchange.
B)In two-person exchanges,the exact outcome of bargaining cannot be predicted unlike with a competitive exchange.
C)The outcomes of two-person exchanges tend to be more equitable than competitive exchanges.
D)In two-person exchanges consumers are price-takers while competitive exchange involves price-makers.

Question 58

The market equilibrium in a many-person setting is an:

A)efficient allocation even though the terms of exchange are indeterminate.
B)efficient allocation because all traders face the same prices.
C)inefficient allocation.Although each pair of traders may arrive at the contract curve,the marginal rates of substitution for different trading pairs may not be equal.
D)inefficient allocation because not everyone likes the prices the market sets.

Question 59

In choosing between points along the contract curve:

A)the decision rule is the greatest good for the greatest number of people.
B)scientific criteria can be used to lead us to the correct distribution of goods.
C)subjective criterion is required to allocate resources.
D)efficiency is always preferred to inefficiency.

Question 60

Two goods are allocated efficiently between consumers when _____.

A)the quantities of goods they consume are equal
B)the marginal rates of substitution between the two goods are the same for both consumers
C)there can be further exchanges that will make both consumers better off
D)redistribution makes one consumer better off at the expense of the other

Question 61

Consider a price-controlled good allocated to consumers on a first-come,first-served basis.Consumers end up waiting in line to purchase the good,and this:

A)is more efficient,the higher the opportunity cost of the consumers' time in line.
B)is more equitable than handing out coupons.
C)is less efficient,the higher the opportunity cost of the consumers' time in line.
D)is less equitable than handing out coupons.

Question 62

Nonprice rationing systems usually are:

A)inefficient because it is unlikely that those who value the good the most will get it.
B)inefficient because they result in surpluses in the market.
C)efficient because more emphasis is placed on equity and less on wealth.
D)efficient because goods are distributed to those who deserve them most.

Question 63

Which of the following describes the equilibrium in an Edgeworth box?

A)Any point where the indifference curves of the two individuals intersect
B)All points that show an equal distribution of the two goods between the two individuals
C)Any point inside the box representing scope for mutually beneficial trade.
D)A point of tangency between the indifference curves of the two individuals.

Question 64

Hurricane Ike led to landfall in Galveston,Texas in September 2008.One effect of Ike was to disrupt gasoline supplies,especially to stations in the southeast United States,many of which were unable to raise the price of their gasoline due to legislated anti-price gouging laws.Consequently,people waited for up to four hours for gasoline,provided they were able to find a station that had gasoline to sell.The effect of these anti-price gouging statutes is:

A)to make consumers better off since there is no cost to spend time waiting in line.
B)to ensure that the marginal utility of gasoline across all consumers in a region is equal.
C)to allocate gasoline so that those who value it most are able to get some.
D)to allocate gasoline to those who value it less at the expense of those who value it more.

Question 65

Which of the following is most likely to be the most efficient method of allocation of a scarce resource?

A)A first-come,first-served policy
B)Doling out coupons with the right to purchase a good
C)Conducting a lottery for the right to purchase a good
D)A competitive exchange

Question 66

Two consumers Jim and Pam both have opera tickets and movie tickets.They wish to exchange tickets with each other.Given their utility functions and ,show that their marginal rates of substitution need to be equal for any given distribution of tickets to be efficient.

Question 67

Let the total quantities of two goods,apples and oranges,be 100 and 200 respectively.Jill has an initial allocation of 50 apples and 100 oranges and considers the two goods perfect 1-for-1 substitutes.Jack considers apples and oranges perfect 1-for-1 complements.Using an Edgeworth box,describe the set of allocations which improve economic efficiency.

Question 68

How are prices of goods that you buy in an auction,at a garage sale,and at a drugstore determined? Is the price discovery process the same in all these markets?

Question 69

A secondary market for the resale of baseball tickets,known as scalping:

A)prevents mutually beneficial exchanges.
B)is likely to increase revenues for the team owner since season ticket holders can resell their tickets instead of not attending a game.
C)is likely to increase season-ticket sales since some people who wouldn't have otherwise seen the game,will buy tickets.
D)lowers the ability of the season ticket holders to attend a baseball game with their families.

Question 70

Any system of nonprice rationing could be inefficient because _____.

A)consumers are benefited at the producer's expense
B)it would be virtually impossible to determine consumer preferences
C)buyers and sellers act in self-interest which leads to inefficiency
D)marginal values do not vary across consumers

Question 71

Compared to rationing by prices,non-price rationing by queuing:

A)is more efficient in that those who value the good or service most are more likely to get some.
B)is less efficient in that waiting in line imposes a cost on those waiting in line,with no offsetting benefit to the seller.
C)is less efficient in that in order to sell more of the good or service,suppliers will have to increase the quality of their product beyond what the consumer desires.
D)is more efficient in that in order to sell more of the good or service,suppliers will have to increase the quality of their product beyond what the consumer desires.

Question 72

A ration scheme using coupons could lead to an efficient outcome if _____.

A)consumers could trade coupons with each other
B)the government allocates coupons among consumers
C)the coupons were replaced with money
D)the number of coupons in circulation was limited

Question 73

(

A)What is meant by Pareto efficiency?

Question 74

What did the moral philosopher Adam Smith mean by his invisible hand theorem?

Question 75

Allowing prices to ration goods among consumers results in an:

A)inefficient distribution of goods because the wealthy get the highest quantity.
B)efficient distribution of goods because goods go to those who value them the most.
C)inefficient distribution of goods because goods go to those who value them the most.
D)efficient distribution of goods because the wealthy consumers are unable to buy the quantity they wish.

Question 76

A competitive equilibrium:

A)results in an efficient and equitable allocation.
B)is characterized by equal marginal rates of substitution.
C)occurs when resources are equally allocated between different producers.
D)is not necessarily utility-maximizing.

Question 77

Explain why a competitive equilibrium produces an efficient allocation of goods.

Question 78

What would you expect to see in the market for healthcare if the government decided that healthcare allocation would be done on the basis of altruism? Why?

Question 79

Are non-price allocation mechanisms efficient? Explain.