Deck 12: General Equilibrium and the Efficiency of Perfect Competition

Question 1

Scientists find that eating corn three times a day will prolong life. This leads to a shift in preferences away from wheat and toward corn. As we move from one equilibrium to another, we can predict that

A) all input markets are affected.
B) all input markets except land are affected because both products use land as an input.
C) labor markets are not affected because the wheat industry and the corn industry use laborers to drive tractors.
D) even if they use different technologies, no input markets are affected because they use the same inputs.

Answer 1

A

Question 2

A gas tax holiday would

A) affect the market for gasoline.
B) affect the market for air travel.
C) affect the level of congestion on roads.
D) All of the above are correct.

Answer 2

D

Question 3

It is essential to establish specific criteria to judge the performance of any economic system. Two such criteria are

A) efficiency and equity.
B) profit opportunities and technological progress.
C) efficiency and profit opportunities.
D) technological progress and achieving general equilibrium.

Answer 3

A

Question 4

Assume that an economy producing two products, skateboards and in‐line skates, is initially in equilibrium, and that skateboards and in‐line skates are substitutes. If consumer preferences shift away from skateboards and toward in‐line skates, which of the following will NOT occur?

A) In the short run, firms producing skateboards will incur losses.
B) In the short run, firms producing in‐line skates will earn a profit.
C) Additional capital will begin to flow into in‐line skates production in the long run.
D) Additional capital will begin to flow into skateboard production in the long run.

Question 5

A technological change in the production of cars will

A) affect only the markets for inputs used to produce cars.
B) affect only the way cars are produced.
C) have no effect on consumers.
D) affect input and output markets in the automobile industry and other related industries.

Question 6

Initially the beef and mutton markets are in equilibrium, then preferences shift away from beef and into mutton. If you are a cattle rancher, the best profit-maximizing strategy is to

A) shut down.
B) increase output so as to increase your market share.
C) shift some of your ranching capacity into cattle raising.
D) decrease output so as to minimize short run losses.

Question 7

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. The firm is

A) equally efficient when it produces at points A and B.
B) more efficient when it produces at point A than at point B.
C) more efficient when it produces at point B than at point A.
D) producing at least possible cost anywhere along the given ATC curve.

Question 8

Refer to the information provided in Figure 12.3 below to answer the questions that follow. Figure 12.3

-Refer to Figure 12.3. The DVD industry is a constant-cost industry. As the demand for DVD players shifts from D to $$D ^ { \prime }$$ , which of the following is LEAST likely to result?

A) More resources will be allocated to produce DVD players.
B) The demand for DVDs will increase.
C) If the market for DVD players is competitive, the price will increase to $5.00 in the short and long run.
D) If the market for DVD players is perfectly competitive, economic profits in this industry will increase in the short run, but will fall back to zero in the long run.

Question 9

A new technology is developed for producing microwave ovens that reduces production costs by 10%. Which of the following is the most likely consequence of this technological change?

A) Firms will continue to operate efficiently as long as no firm adopts this new technology.
B) Firms must adopt this new technology to remain efficient.
C) This new technology will not affect efficiency, but it will change the equilibrium price and quantity for this industry.
D) If firms do not adopt this new technology, then the economy will remain in general equilibrium, because firms will not change their price and output decisions.

Question 10

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2
Refer to Figure 12.2. A technological advance causes the supply of personal computers to increase. The graph of this situation represents a

A) general equilibrium analysis because it identifies what happens to both equilibrium price and quantity of personal computers.
B) partial equilibrium analysis because it considers only this one industry.
C) firm-specific analysis because only one firm would be affected by the technological advance.
D) technological analysis because the change resulted from a technological advance.

Question 11

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1
Refer to Figure 12.1. This firm is currently at Point A on the ATC curve. If this firm moves toward Point B, this will make the

A) distribution of outcome more equitable.
B) economy more stable.
C) economy more efficient.
D) economy less stable.

Question 12

Firms stop producing tapes and start producing compact discs because people prefer compact discs to tapes. This will

A) make the distribution of outcome more equitable.
B) make the economy more stable.
C) improve efficiency.
D) make the economy less stable.

Question 13

To conduct a general equilibrium analysis of a change in consumer preferences away from beef and toward chicken, you must consider

A) changes in the equilibrium prices and quantities of beef and chicken.
B) changes in the amount of resources allocated to the production of beef and chicken.
C) changes in the price of resources allocated to the production of beef and chicken.
D) all of the above

Question 14

Resources are allocated efficiently when

A) the market produces what people want.
B) economic profits are zero.
C) output is distributed in an equitable fashion.
D) output is produced in a sustainable fashion.

Question 15

Preferences have just shifted away from beef and into mutton. If you are a sheep rancher, the best profit-maximizing strategy is to

A) shut down.
B) produce as much as possible to earn profits in the short run.
C) shift some of your ranching capacity into cattle raising.
D) cut prices to increase market share.

Question 16

Which of the following questions is NOT answered by general equilibrium analysis?

A) Are equilibria in different markets compatible with one another?
B) Can all markets simultaneously be in equilibrium?
C) How will a change in one market affect another market?
D) What outcome is most desirable for the whole society?

Question 17

Examining the equilibrium conditions of individual markets and for households and firms separately is referred to as

A) partial equilibrium analysis.
B) general equilibrium analysis.
C) comparative statics.
D) efficiency analysis.

Question 18

Suppose there is a permanent shift of consumer preferences away from pretzels and toward potato chips. The most likely result would be

A) in the short run, economic losses in the potato chip market.
B) in the long run, a fall in the supply of potato chips.
C) in the short run, a rise in the price of pretzels.
D) short-run profits in the potato chip market increase.

Question 19

Efficiency occurs when

A) the economy is producing what people want at least possible cost.
B) the economy has a fair and just distribution of income.
C) all markets are in equilibrium.
D) unemployment is low and prices are stable.

Question 20

Suppose that a town has two major hospitals. One of these hospitals is unionized and the union has just negotiated a 10% wage increase each year for the next three years. Which of the following is most likely to occur?

A) The price of labor in the unionized hospital will increase, but there will be no changes in the price of labor in the nonunionized hospital.
B) The price of labor will change in both the union and nonunion hospitals, but no other input markets will be affected.
C) The price of labor will change in both the unionized and nonunionized hospitals. Employment of labor and other inputs is also likely to change in both hospitals.
D) The only effect will be that the price charged by the unionized hospital will increase to cover the additional costs of labor.

Question 21

Input and output markets operate independently and thus should be analyzed as separate entities.

Question 22

When one market reaches a new equilibrium, the general equilibrium condition has been satisfied.

Question 23

Pareto optimality is the condition in which

A) the distribution of income is equal.
B) no change is possible that will make some members of society better off without making at least one other member of society worse off.
C) firms are forced to internalize the effects of all externalities.
D) it is possible to make one person better off without making someone else worse off.

Question 24

A person who chooses not to be in the labor force reveals that

A) his potential product in the market is zero.
B) either leisure or the value of nonpaid labor is worth more to him than the value that society places on his potential product in the market.
C) either leisure or the value of nonpaid labor is worth less to him than the value that society places on his potential product in the market.
D) either leisure or the value of nonpaid labor is worth zero to him.

Question 25

Partial equilibrium analysis is the process of examining the equilibrium conditions for households and firms combined for more than one but not all individual markets.

Question 26

The opportunity cost of using resources to produce more of one good instead of more of another good is its

A) marginal revenue.
B) marginal cost.
C) price.
D) total cost.

Question 27

Suppose a new government policy will generate $5,000 of benefits for local businesses and $3,000 of costs. This policy can best be described as

A) Pareto efficient.
B) inefficient.
C) potentially efficient.
D) equitable.

Question 28

Efficiency is the condition in which the economy is producing what people want at the least possible cost.

Question 29

Suppose a policy change will generate $180,000 of benefits for low-income families and $150,000 of costs for high-income and middle-class families. This change can best be described as

A) inefficient.
B) Pareto efficient.
C) potentially efficient.
D) equitable.

Question 30

A voluntary exchange between Mike (the purchaser) and Wayne (the seller) occurs because

A) Mike stands to gain and Wayne to lose.
B) Mike stands to lose and Wayne to gain.
C) they both gain from the transaction.
D) they had no choice.

Question 31

An activity that makes some people better off and nobody worse off is a

A) government transfer program such as Social Security.
B) reduction in interest rates.
C) price floor that increases income to suppliers.
D) voluntary exchange.

Question 32

If a restaurant runs a special and sells a lobster dinner for $4.50, Amy buys one lobster dinner a week. If lobster dinners are not on special and the price is $16.00, Amy buys zero lobster dinners per week. Which of the following is true?

A) Amy's demand for lobster is inelastic.
B) Amy's marginal utility from a lobster dinner is less than $4.50.
C) The value of Amy's marginal utility from a lobster dinner is at least $4.50 and less than $16.00.
D) Amy's marginal utility from a lobster dinner is greater than $16.00.

Question 33

General equilibrium exists when all markets in an economy are simultaneously in equilibrium.

Question 34

Suppose a policy change will generate $100,000 of benefits for low-income families and $120,000 of costs for high-income families. This change can best be described as

A) Pareto efficient.
B) inefficient.
C) potentially efficient.
D) equitable.

Question 35

Refer to the information provided in Figure 12.4 below to answer the questions that follow. Figure 12.4
Refer to Figure 12.4. Hula hoops are produced in a perfectly competitive market. This hula hoop firm is currently producing and selling 100 hula hoops per week. Which of the following is true?

A) Society would be better off if more hula hoops were produced because at the current level of production price is greater than marginal cost.
B) Society would be better off if fewer hula hoops were produced because if this firm reduced its production, its profits would increase.
C) Hula hoop production is at the efficient level because ATC is minimized.
D) Fewer resources should be devoted to hula hoop production because ATC is less than price.

Question 36

Both economists and mathematicians have shown there exists at least one set of prices that will clear all markets in a system simultaneously, known as equilibrium price.

Question 37

A condition in which no change is possible that will make some members of society better off without making some other members of society worse off is called

A) Pareto optimality.
B) partial equilibrium.
C) general equilibrium.
D) market failure.

Question 38

A household will buy a good as long as the

A) good's price is greater than the maximum a consumer would be willing to pay for it.
B) marginal utility from its consumption is greater than or equal to its market price.
C) good still provides the consumer with average utility.
D) good's use value is less than the price being charged for the good.

Question 39

An economist has estimated that the maintenance of a public park costs $25,000 a year and that the public park generates $30,000 a year in revenue for merchants near the park. From society's point of view, the maintenance of this park is

A) inefficient because everyone in the community pays taxes to support the park, but only the merchants near the park benefit.
B) inefficient because the additional revenues generated by the park are so low.
C) potentially efficient because the value of the gains exceed the value of the costs.
D) potentially efficient because no one would be made worse off as a result of maintaining the park.

Question 40

If some gain and some lose as the result of a change, and it can be demonstrated that the value of the gains exceeds the value of the losses, then the change is said to be

A) potentially efficient.
B) inefficient.
C) unequivocally Pareto optimal.
D) technically efficient.

Question 41

In perfect competition, the condition that ensures that the right things are produced is

A) MUX = PX.
B) P = MC.
C) P = ATC.
D) MRPL = ATC.

Question 42

You value your favorite shirt at $110. Someone else values it at $150, and that person is willing to pay you $120 for your shirt. Would selling your shirt to this person for $120 be Pareto efficient?

A) No, because you did not receive the maximum amount the other person would have been willing to pay for the shirt.
B) No, the person paid you $120 for the shirt so his net benefit was $30, while your net benefit was $10. For this change to be Pareto efficient, each of you should have the same net benefit.
C) Yes, because even though you gain from the trade and he loses, there is the potential for you to compensate him for his loss.
D) Yes, because both of you are better off as a result of the trade.

Question 43

In order to have an efficient distribution of final products to households,

A) free and open markets are essential.
B) households must maximize their income.
C) the equity criterion must be satisfied.
D) there can be no unemployment.

Question 44

Under perfect competition, the person that ends up with the marginal unit is the person that values it

A) at an amount above its price.
B) at an amount lower than its price.
C) exactly at its price.
D) above its marginal cost.

Question 45

A ________ system is one in which all possible trades that make some societal members better off without making others worse off have been exhausted.

A) Pareto maximized
B) Pareto optimal
C) market
D) general equilibrium

Question 46

________ reflects household willingness to pay, and ________ reflects the opportunity cost of the resources needed to produce a good.

A) Marginal utility; price
B) Price; marginal cost
C) Price; average total cost
D) Demand; price

Question 47

You value your economics textbook at $10. Someone else values it at $25, and that person is willing to pay you $20 for your textbook. Would selling your textbook to this person for $20 be Pareto efficient?

A) No, because you did not receive the maximum amount the other person would have been willing to pay for the textbook.
B) No, the person paid you $20 for the book so his net benefit was only $5, whereas your net benefit was $10. For this change to be Pareto efficient, each of you should have the same net benefit.
C) Yes, because both of you are better off as a result of the trade.
D) Yes, because even though you gain from the trade and he loses, there is the potential for you to compensate him for his loss.

Question 48

If at the current output of X the PX < MCX, then society gains by

A) producing more X.
B) producing less X.
C) lowering the price of X.
D) increasing the cost of producing X.

Question 49

Under perfect competition, the efficient level of output is produced because

A) government regulates the output level that must be produced.
B) firms earn only a normal profit in the long run.
C) firms can earn an economic profit in the long run.
D) price equals marginal cost.

Question 50

In perfect competition, when firms are maximizing profits and households are maximizing utility,

A) Pareto optimality has been obtained.
B) voluntary exchange can be used to make both firms and households better off.
C) the outcome is inefficient.
D) individual welfare is maximized, but social welfare is not.

Question 51

Relating to the Economics in Practice on page 257: Ethanol is a fuel produced from corn, and ethanol subsidies have increased the supply of corn. As a result, demand for farm land has ________. Further, the supply of other grains has ________.

A) increased; increased
B) decreased; decreased
C) increased; decreased
D) decreased; increased

Question 52

The condition P = MC implies that

A) there is no consumer surplus for any consumer.
B) an individual who values the product at more than P will receive consumer surplus.
C) an individual who values the product at less than P will receive consumer surplus.
D) the amount of consumer surplus is infinite.

Question 53

Society will produce the efficient mix of output if all firms equate

A) price and marginal cost.
B) price and average total cost.
C) marginal cost and average total cost.
D) price and marginal revenue.

Question 54

If at the current output of X the PX > MCX, then society gains by

A) producing more X.
B) producing less X.
C) raising the price of X.
D) increasing the cost of producing X.

Question 55

Which assumption(s) is (are) necessary for an efficient allocation of resources among firms?

A) Factor markets are open and competitive.
B) All firms pay the same prices for inputs.
C) Firms behave so as to maximize their profits.
D) All of the above are correct.

Question 56

When all the conditions for perfect competition are met,

A) resources are allocated among firms efficiently.
B) final products are distributed among households efficiently.
C) the system produces the goods and services consumers want.
D) All of the above are correct.

Question 57

Relating to the Economics in Practice on page 257: Which of the following would be an expected result of increased government subsidies for ethanol, a fuel produced from corn?

A) an increase in the price of gasoline made in part from ethanol
B) an increase in the price of land used to farm corn
C) decreases in the price of land used to farm grains other than corn
D) a decrease in the production of corn relative to other grains

Question 58

If society will gain by producing more X, then it must be the case that currently

A) PX = MCX.
B) PX > MCX.
C) PX < MCX.
D) either PX > MCX or PX < MCX.

Question 59

Marginal cost is a good measure of

A) the social value of a marginal unit of a good.
B) the least costly way to produce all units of a good.
C) what society gives up by using resources to produce more of a good or service.
D) what society gains by using resources to produce more of a good or service.

Question 60

In making labor supply decisions, households weigh

A) the market wage against the value of market produced goods.
B) the market wage against the value of their marginal product of labor.
C) the market wage against the value of leisure and time spent in unpaid household production.
D) child care costs.

Question 61

The whole class of goods that will be underproduced or not produced at all in a completely unregulated market economy are referred to as

A) free goods.
B) Pareto goods.
C) private goods.
D) public goods.

Question 62

Which of the following would be classified as an external cost?

A) As more firms began hiring computer programmers, the salaries of computer programmers increased, and therefore the firm's cost of production increased.
B) A private firm will not provide national defense, as it is impossible to confine the benefits to only those individuals who have paid for it.
C) You are not able to study at night because there is so much noise coming from the dorm room next to yours.
D) When you purchase a prescription drug, you are not made fully aware of all the possible side effects that may result from taking the drug.

Question 63

All of the following are true about public goods EXCEPT:

A) bestow collective benefits on members of society.
B) are non-excludable since those who do not pay for them cannot be excluded from enjoying them.
C) will be under supplied by the private sector.
D) are only produced by government agencies.

Question 64

A perfectly competitive system is efficient.

Question 65

________ is an example of a public good.

A) An automobile
B) National defense
C) A restaurant meal
D) A medical service

Question 66

When resources are misallocated, or allocated inefficiently,

A) market failure occurs.
B) then there must be external costs or benefits in production.
C) then it must be the case that there is imperfect information in the market.
D) then it must be the case that the good is a public good.

Question 67

Because public goods are characterized by being collectively consumed,

A) the government cannot produce them.
B) they are illegal.
C) they are very expensive; thus the private sector cannot provide them.
D) the private sector may not provide them because they cannot exclude those who do not pay.

Question 68

An example of a public good is

A) an apple.
B) a public utility.
C) a joke.
D) a book.

Question 69

If after a change in an allocation it can be demonstrated that the value of the gains exceeds the value of the losses, then the change is said to be potentially efficient.

Question 70

Assume that the marginal cost of producing steel does not include the cost of the damage to the environment as a result of pollution. By producing where P = MC, the firm will be producing

A) the efficient amount of steel.
B) more than the efficient amount of steel.
C) less than the efficient amount of steel.
D) a zero quantity of steel.

Question 71

If no one can be excluded from consuming its benefits and there is no rivalry in consumption, then the good is a ________ good.

A) private
B) Pareto
C) public
D) free

Question 72

Sources of market failure include

A) private goods.
B) competitive behavior.
C) externalities.
D) unequal income distribution.

Question 73

Public goods are generally produced by

A) the government.
B) monopolies.
C) perfectly competitive industries.
D) freely functioning markets.

Question 74

A government policy generates $10,000 of benefits to underprivileged youth at a cost of $5,000 to taxpayers. The policy is Pareto efficient.

Question 75

Assume that price underestimates the value that society places on the flu vaccine. If firms produce where P = MC, firms will be producing

A) the socially efficient amount of flu vaccine.
B) more than the socially efficient amount of flu vaccine
C) less than the socially efficient amount of flu vaccine.
D) so that consumer surplus is zero.

Question 76

Efficiency and equity are synonymous.

Question 77

Which one of the following is NOT a source of market failure?

A) externalities
B) public goods
C) imperfect information
D) price ceilings

Question 78

Market failure occurs when

A) firms that are incurring losses leave a market.
B) perfectly competitive firms produce where MR = MC.
C) resources are misallocated, or allocated inefficiently.
D) firms are only able to earn a normal profit.

Question 79

For a policy to be Pareto efficient, it must make everyone at least a little better off.

Question 80

A perfectly competitive system results in an efficient allocation of resources among firms and an equal distribution of final products among households.