Question 1

Worker surplus can be measured as an area on the market labor supply curve if worker tastes are quasilinear in leisure.

Accepted Answer

In this case,the compensated labor supply curve is the same as the uncompensated labor supply curve.

Question 2

Absent any violations of the first welfare theorem,the competitive equilibrium is efficient.

Accepted Answer

That is in fact the first welfare theorem -- absent any of the distortions from violations of the underlying conditions,markets are efficient.

Question 3

Aggregate producer surplus in an industry can be measured along the market supply curve in the short run but not in the long run.

Accepted Answer

It can be measured along the long run market supply curve in the long run.

Question 4

If the individuals in a group of consumers all have homothetic tastes,then we can treat the group as a single representative consumer.

Accepted Answer

If individuals have homothetic tastes,it means that each individual will remain on the same ray from the origin as income changes.But different individuals might optimize on different rays from the origin (and still all have homothetic tastes)-- in which case the change in their consumption as income is redistributed is not offsetting.

Question 5

In a 2-good model,suppose that all individuals have tastes that are quasilinear in either good 1 or in good 2 (with some of each represented in the group.)The quasilinearity of everyone's tastes is then sufficient to insure that we can treat the group as if it were a single representative consumer.

Accepted Answer

Individuals whose tastes are quasilinear in good 1 would change only good 2 consumption as income changed,and individuals whose tastes are quasilinear in good 2 would only change their consumption of good 1as income changes.Thus,some redistributions of income within the group will cause the group bundle to change.

Question 6

If the individuals in a group of consumers have identical tastes,then the group can be treated as if it behaved as a singe representative consumer.

Accepted Answer

Consider the indifference map below and suppose 2 individuals both share this map.Initially the first optimizes at A while the second optimizes at B.We then redistribute income so that both have the middle budget line as their constraint -- and they both optimize at C.Clearly their paths are not offsetting -- so they do not behave as if they were a single individual despite sharing the same tastes. 11ea78ab_dca4_30e0_8379_21b16cbecb0d_TB2157_00

Question 7

Suppose all individuals in a group have homothetic tastes.Then we can be sure that the group can be treated as a single representative consumer is if the group members also have identical tastes.

Accepted Answer

When tastes are homothetic,optimal bundles always lie on the same ray from the origin as income changes.If tastes are also the same for all group members,then optimal bundles lie on the same ray from the origin as income changes -- which means that changes in individual behavior will exactly offset each other as income is redistributed within the group.

Question 8

If a group of individual consumers can be treated as a single representative consumer,then the aggregate consumer surplus of the group can be measured along the market demand curve.

Accepted Answer

This is the case only if tastes are quasilinear.

Question 9

How would you contrast the interactions within a small family to those in the market place? In what way could you argue that the ways in which interactions are governed in the family can never work in a larger market setting -- just as the ways in which interactions are structured in market settings can never work well in families?

Accepted Answer

The answer of How would you contrast the interactions within...

Question 10

Suppose the conditions of the first welfare theorem hold.If the government redistributes income prior to production and trade occurring,the market outcome (resulting from production and trade)will be the same as it would have been had the government not redistributed income (so long as redistribution does not produce deadweight losses).

Accepted Answer

This is only true when tastes are quasilinear.

Question 11

Absent any violations of the conditions underlying the first welfare theorem,the competitive market equilibrium is efficient if and only if tastes are quasilinear.

Accepted Answer

The first welfare theorem holds regardless of whether tastes are quasilinear.

Question 12

Absent any violations of the first welfare theorem,the competitive market production level of a good will be the same as that chosen by a social planner whose goal includes (but is not necessarily limited to)efficiency.

Accepted Answer

This is only true when tastes are quasilinear.If they are not,then a social planner might wish to redistribute income -- which would imply market demand and aggregate MWTP curves would shift.

Question 13

Suppose the conditions of the first welfare theorem hold.If the government redistributes income prior to production and trade occurring,the market outcome (resulting from production and trade)will be efficient so long as no deadweight loss is produced in the levying of redistributive taxation.

Accepted Answer

The first welfare theorem holds for any initial distribution of income -- so if the government achieves a new distribution of income before letting markets work,and if it does so without generating a deadweight loss,then the equilibrium is efficient.

Question 14

If consumers within an industry cannot be represented by as single representative consumer,then the industry equilibrium does not occur where market demand intersects market supply.

Accepted Answer

The industry equilibrium always lies were market demand intersects supply.

Question 15

If consumer tastes are quasilinear -- and ignoring the possibility of corner solutions and violations of the conditions of the first welfare theorem,the competitive market production level of the quasilinear good will be the same as that chosen by a social planner whose goal includes (but is not necessarily limited to)efficiency.

Accepted Answer

Regardless of how income is redistributed,the overall quantity of the quasilinear good that is demand remains the same and can be measured along a demand curve that arises from the decisions of a representative consumer with quasilinear tastes.Thus,the market demand curve is the same as the aggregate MWTP curve and does not change as income is redistributed.So,even if the social planner wishes to redistribute income for equity reasons,efficiency will always dictate the same level of output in the quasilinear market.

Question 16

A "social planner" is a fictional societal planner who would always choose the same outcome as the competitive market.

Accepted Answer

A social planner is an economist's fictional societal planner who tries to accomplish some goal and might,in some instances,mimic the market.

Question 17

In a 2-good model,if individuals in a group all have tastes that are quasilinear in good 1,then we can treat the group as if it was a single representative consumer.

Accepted Answer

See Graph 15.2 in the text.

Question 18

Aggregate producer surplus in an industry is measured along the market supply curve is and only if firm production technologies exhibit the quasilinearity property.

Accepted Answer

Aggregate producer surplus is always measured along the market supply curve.

Quiz 15: The Invisible Hand and the First Welfare Theorem