Question 1

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?

Accepted Answer

Pareto efficiency is achieved when no party can be made better off without making another party worse off. In this scenario, selling the shirt for $120 makes you better off by $10 (since you value it at $110) and the buyer better off by $30 (since they value it at $150). Both parties are better off after the trade, making it Pareto efficient.

Question 2

Refer to the information provided in Figure 12.5 below to answer the question(s) that follow.  Figure 12.5
-Refer to Figure 12.5. A firm produces hula hoops in a perfectly competitive market and currently produces and sells 100 per week. At this production quantity of 100 per week, society would be best served

Accepted Answer

The answer of Refer to the information provided in Figure...

Question 3

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

Accepted Answer

C) potentially efficient because the value of the gains exceed the value of the costs. This choice indicates that the benefits ($30,000 in revenue for merchants) outweigh the costs ($25,000 for maintenance), suggesting an overall gain for society.

Question 4

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

Accepted Answer

This change is potentially efficient because the total benefits exceed the total costs, suggesting that those who benefit could theoretically compensate those who are harmed and still be better off, aligning with the concept of potential Pareto efficiency. However, whether it is equitable depends on value judgments about the distribution of costs and benefits across different income groups.

Question 5

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

Accepted Answer

Voluntary exchange is an activity where both parties involved agree to the transaction because they both expect to benefit, making some people better off without making anyone worse off.

Question 6

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

Accepted Answer

The policy change will generate $100,000 of benefits for low-income families and $120,000 of costs for high-income families. This means that the policy change will make low-income families better off and high-income families worse off. Therefore, the policy change is inefficient.

Question 7

Marginal cost is a good measure of

Accepted Answer

Marginal cost reflects the additional cost incurred by producing one more unit of a good or service, essentially representing what society must give up in terms of resources (like labor, materials, etc.) to produce that additional unit. This concept is crucial in understanding the trade-offs involved in allocating resources for production.

Question 8

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

Accepted Answer

The opportunity cost of using resources to produce more of one good instead of another is best represented by its marginal cost, which is the cost of producing one additional unit of a good. This concept reflects the trade-offs involved in allocating resources to different production activities.

Question 9

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

Accepted Answer

A Pareto optimal system is one where no individual or preference criterion can be better off without making at least one individual or preference criterion worse off, meaning all opportunities for mutually beneficial trade have been fully exploited.

Question 10

Refer to the information provided in Figure 12.5 below to answer the question(s) that follow.  Figure 12.5
-Refer to Figure 12.5. 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?

Accepted Answer

In a perfectly competitive market, the efficient level of production is where price equals marginal cost. If price is greater than marginal cost, as stated, it means that producing more would add more to total revenue than to total cost, thus benefiting society by increasing total surplus.

Question 11

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

Accepted Answer

The policy is potentially efficient because the total benefits ($5,000) exceed the total costs ($3,000), suggesting that those who benefit could theoretically compensate those who bear the costs and still be better off, fitting the concept of potential Pareto efficiency.

Question 12

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

Accepted Answer

Choosing not to participate in the labor force indicates that the individual values leisure or the benefits of unpaid work more than the compensation they would receive from paid employment, reflecting personal priorities over societal valuation of their potential market contribution.

Question 13

A household will buy a good as long as the

Accepted Answer

The principle of consumer behavior states that a household will continue to buy a good as long as the marginal utility (additional satisfaction) obtained from consuming one more unit of the good is greater than or equal to the price paid for it. This ensures that the consumer is getting at least as much value from the good as they are paying for it, making it a rational choice to purchase.

Question 14

In making labor supply decisions, households weigh

Accepted Answer

Households consider the trade-off between earning income through work (at the market wage) and the value of spending time on leisure or unpaid household activities. This decision involves comparing the opportunity cost of working to the benefits of non-work activities.

Question 15

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?

Accepted Answer

Pareto efficiency is achieved when no individual can be made better off without making someone else worse off. In this scenario, both parties benefit from the trade without harming the other, making the transaction Pareto efficient. You value the book at $10 but receive $20, and the other person values it at $25 and pays $20, so both parties are better off.

Question 16

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?

Accepted Answer

Amy's willingness to buy the lobster dinner at $4.50 but not at $16.00 suggests that her valuation (marginal utility) of the dinner is at least $4.50 (since she buys it at that price) but less than $16.00 (since she does not buy it at that price).

Question 17

When all the conditions for perfect competition are met,

Accepted Answer

When all conditions for perfect competition are met, resources are allocated efficiently among firms, final products are distributed efficiently among households, and the system produces the goods and services that consumers want, making all of the statements correct.

Question 18

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

Accepted Answer

In a perfect competition scenario, when firms are maximizing profits and households are maximizing utility, the market reaches a state of Pareto optimality. This means that it is impossible to make any one individual better off without making someone else worse off, indicating an efficient allocation of resources.

Question 19

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

Accepted Answer

This is a description of potential Pareto efficiency, or the Kaldor-Hicks criterion, where a change is considered potentially efficient if the gains from the change can, in theory, compensate the losers and still have some benefits left over. It does not require that compensation actually happens, only that it could.

Question 20

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

Accepted Answer

In a voluntary exchange, both parties agree to the transaction because they both expect to benefit or gain from it. Mike gains something he values more than the money he pays, and Wayne gains money he values more than the item he sells.

Quiz 12: General Equilibrium and the Efficiency of Perfect Competition