Question 1

A firm produces an output level at which price is greater than marginal cost. Explain why this is inefficient.

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Question 2

Antitrust cases that are brought to the courts by the Justice Department typically rely on perfect competition as a benchmark for lawyers to determine whether a firm is competitive or monopolistic. Why is this a troublesome criterion to use in prosecuting such cases?

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Question 3

Assume there is a toll bridge that is built by a private firm. It's been determined by cost accountants that the marginal cost that each automobile imposes is close to zero. If the bridge cost $1 million to build and 250,000 automobiles cross it each day what is the price that would be necessary for the firm to charge in order to achieve the key efficiency criteria of perfect competition? How might this be a problem for this private bridge company?

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Question 4

Is it theoretically possible for general equilibrium to be attained? Is it likely that general equilibrium will be attained? Explain.

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Question 5

Why does the model of perfect competition imply that firms will produce the products that households want the most?

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Question 6

Why does the model of perfect competition imply that there will be an efficient allocation of resources among firms?

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Question 7

Why does an efficient distribution of outputs among households occur in perfectly competitive markets?

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Question 8

Create an example of a Pareto efficient trade. Make sure that you explain why such a trade is Pareto efficient.

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Question 9

What condition must be satisfied so that society is producing the efficient mix of output? Why does this condition guarantee efficiency?

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Question 10

What is Pareto optimality?

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Question 11

If the economy were truly made of industries that fit the textbook definition of perfect competition what do you expect would be a major disadvantage of this from the consumer's perspective?

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Question 12

Use the three basic questions to describe why perfect competition is efficient.

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Question 13

When parents inoculate their children from communicable diseases prior to sending them off to school they not only provide their own children a benefit but also bestow a benefit on every other student at the school. There are now fewer students who can pass on these types of diseases. However, parents are not likely to take into account the fact that their actions create this external benefit. Therefore, economists argue that the market on its own may not provide for the optimal level of inoculations. What methods might work to get parents to take into account the external benefit when deciding whether to inoculate their children?

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Question 14

What three assumptions must hold for the allocation of resources among firms to be efficient?

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Question 15

Create an example of a trade that is not Pareto efficient. Make sure that you explain why such a trade is not Pareto efficient.

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Question 16

What are the three basic economic questions that must be answered by all societies?

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Question 17

Define public goods. Give an example of a public good. Explain why private firms will not generally produce public goods.

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Question 18

Students arriving late to class are a potential negative externality because their tardiness may interrupt the instructor and distract students. Can you think of any way in which this externality could be curbed? That is, can you think of any methods that could be employed to internalize this negative externality?

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Question 19

How is a potentially efficient change different from a Pareto optimal change?

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Question 20

Do the assumptions of the perfectly competitive model describe all real-world markets? Explain.

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Quiz 12: General Equilibrium and the Efficiency of Perfect Competition