Deck 16: General Equilibrium Theory

Question 1

In a general equilibrium setting,the supply curves for final goods and services are determined by

A) profit maximization by firms.
B) cost minimization by firms.
C) profit maximization by consumers.
D) utility maximization by consumers.

Answer 1

A

Question 2

Let the demand and supply for two linked products,say corn and soy,be the following: Q_c^d= 12 - 2p_c + p_s; Q_c^s = 4+p_c; Q_s^d = 6-4p_s + p_c; Q_s^s = 4 + p_s.The superscript refers to "demand" (d) or "supply" (s) and the subscript refers to corn (c) or soy (s).Now,suppose that the demand for corn shifts to Q_c^d = 18 - 2p_c + p_s.If the price of soy is free to adjust in response to this shift,what are the new equilibrium prices of corn and soy?

A) p_c = 5.14; p_s =1.43
B) p_c = 6.20; p_s =2.15
C) p_c = 2.50; p_s =2.50
D) p_c = 4.35; p_s =2.00

Answer 2

A

Question 3

According to Walras' Law,in a general competitive equilibrium with a total of ____ markets,if supply equals demand in the first _____ markets,then supply will equal demand in the _____ market as well.

A) three; two; first
B) three; three; third
C) three; two; third
D) three; three; first

Answer 3

C

Question 4

Which of the following statements is incorrect?

A) A partial equilibrium analysis studies the determination of price and output in a single market.
B) A general equilibrium analysis studies the determination of price and output in more than one market simultaneously.
C) A partial equilibrium analysis ignores either consumers or producers in the analysis and looks only at one-half of the market.
D) A general equilibrium analysis would be useful to study two goods that are linked in some way, such as complementary or substitutable goods.

Question 5

Your textbook discussed a model of a simple economy with four markets: labor,capital,energy,and food.Which of the following statements is inconsistent with a general equilibrium for this simple economy?

A) The household demand for energy equals the industry supply of energy.
B) The household demand for food equals the industry supply of food.
C) The household demand for labor equals the industry supply of labor.
D) The household supply of capital equals the industry demand for capital.

Question 6

If we consider two spices,cumin and paprika,to be substitutes,a drop in the supply of paprika,will probably cause an increase in the price of

A) both
B) neither
C) cumin
D) paprika

Question 7

Suppose coffee and cream are complementary goods.If the supply of cream falls we would expect the price of coffee to go ________ and the equilibrium quantity of coffee to go ________.

A) down, down
B) down, up
C) up, down
D) up, up

Question 8

The prices of complementary goods tend to be _______________.

A) positively correlated.
B) inversely related.
C) unrelated.
D) related to the prices of substitute goods.

Question 9

Suppose that black tea and green tea are substitute goods.Suppose that an excellent growing season for green tea increases the supply of green tea.What happens in the market for black tea?

A) Supply increases.
B) Supply decreases.
C) Demand increases.
D) Demand decreases.

Question 10

The prices of substitute goods tend to be ____________.

A) positively correlated.
B) inversely related.
C) unrelated.
D) related to the prices of substitute goods.

Question 11

Suppose chicken breasts and barbeque sauce are known to be complements,a change in tastes toward a greater demand for chicken will likely cause

A) an increase in the price of chicken and a drop in the price of barbeque sauce.
B) an increase in the price of chicken and an increase in the price of barbeque sauce.
C) a drop in the price of chicken and a drop in the price of barbeque sauce.
D) a drop in chicken prices and an increase in the price of barbeque sauce.

Question 12

Let the demand and supply for two linked products,say corn and soy,be the following: Q_c^d= 12 - 2p_c + p_s; Q_c^s = 4+p_c; Q_s^d = 6-4p_s + p_c; Q_s^s = 4 + p_s.The superscript refers to "demand" (d) or "supply" (s) and the subscript refers to corn (c) or soy (s).Now,suppose that the demand for corn shifts to Q_c^d = 18 - 2p_c + p_s.If the price of soy does not adjust in response to this shift,what is the new equilibrium price of corn?

A) p_c = 2
B) p_c = 1
C) p_c = 3
D) p_c = 5

Question 13

Walras' Law tells us that,

A) supply will always equal demand.
B) if an economy has five markets and if supply equals demand in three of those markets, then supply will equal demand in the other two markets.
C) the prices in an N market economy can be determined for all N markets.
D) if an economy has five markets, then a general equilibrium analysis will yield the prices in four of the markets relative to the price in the fifth market.

Question 14

In a general equilibrium setting,the demand curves for production inputs are determined by

A) utility maximization by firms.
B) profit maximization by firms.
C) cost minimization by firms.
D) utility maximization by consumers.

Question 15

Walras' Law states that general equilibrium determines the prices of all goods and inputs

A) with absolute certainty.
B) relative to the price of another good or input.
C) only after the effects of an exogenous shock to a market are determined.
D) relative to efficient prices.

Question 16

Suppose chicken breasts and pork steaks are substitute goods.If the supply of chicken breasts increases we would expect the price of pork steaks to go ________ and the equilibrium quantity of pork steaks to go ________

A) down, down
B) down, up
C) up, down
D) up, up

Question 17

Let the demand and supply for two linked products,say corn and soy,be the following: Q_c^d= 12 - 2p_c + p_s; Q_c^s = 4+p_c; Q_s^d = 6-4p_s + p_c; Q_s^s = 4 + p_s.The superscript refers to "demand" (d) or "supply" (s) and the subscript refers to corn (c) or soy (s).What are the equilibrium prices of corn and soy?

A) p_c = 2; p_s = 2
B) p_c = 1; p_s = 3
C) p_c = 3; p_s = 1
D) p_c = 1; p_s = 1

Question 18

The general equilibrium effects of an excise tax on a commodity which would then be used to fund improvements to our national parks

A) would probably raise the price of the commodity and raise the price of labor in the national park system.
B) would probably lower the price of the commodity and raise the price of labor in the national park system.
C) would probably raise the price of the commodity and raise the price of labor in the economy as a whole.
D) would probably raise the price of the commodity and lower the price of labor in the economy as a whole.

Question 19

Let the demand and supply for two linked products,say corn and soy,be the following: Q_c^d= 12 - 2p_c + p_s; Q_c^s = 4+p_c; Q_s^d = 6-4p_s + p_c; Q_s^s = 4 + p_s.The superscript refers to "demand" (d) or "supply" (s) and the subscript refers to corn (c) or soy (s).Now,suppose that the demand for corn shifts to Q_c^d = 18 - 2p_c + p_s.If we conduct a partial equilibrium analysis of the corn market,taking the price of soy as given,rather than a general equilibrium analysis,allowing the price of soy to change,we:

A) underestimate the new price of corn.
B) overestimate the new price of corn.
C) correctly estimate the new price of corn.
D) Overestimate the new price of soy.

Question 20

Partial equilibrium analysis differs from general equilibrium analysis in that

A) a partial equilibrium analysis studies the determination of price and output determination, whereas general equilibrium includes a greater number of variables.
B) prices are not held constant in all other markets in partial equilibrium, but in general equilibrium they are.
C) a partial equilibrium analysis studies the determination of price and output in a single market, whereas general equilibrium looks at more than one market simultaneously.
D) a general equilibrium holds prices constant in multiple markets, whereas partial equilibrium does not.

Question 21

When a fixed stock of inputs cannot be reallocated in such a way to make all consumers better off by producing more of one product and less of another product,the allocation satisfies

A) exchange efficiency.
B) input efficiency.
C) substitution efficiency.
D) Walras' Law.

Question 22

An allocation of goods and inputs in an economy is economically efficient if

A) that allocation minimizes costs.
B) that allocation maximizes profits.
C) there exists an alternative, feasible allocation of goods and inputs that would make all consumers better off as compared with the initial allocation.
D) there does not exist an alternative, feasible allocation of goods and inputs that would make all consumers better off as compared with the initial allocation.

Question 23

When a fixed stock of inputs cannot be reallocated among firms in an economy without reducing the output of at least one of the goods that is produced in the economy,the allocation satisfies.

A) exchange efficiency.
B) input efficiency.
C) substitution efficiency.
D) Walras' Law.

Question 24

Consider point A in the Edgeworth box.Does point A satisfy the condition of exchange efficiency?

A) Yes
B) No
C) Yes, as long as point A does not represent the initial endowments of goods for the two players.
D) Cannot be determined from the figure.

Question 25

The general equilibrium effects of an excise tax on agricultural commodities which would then be used to purchase books for school children would tend to

A) raise the price of agricultural commodities and lower the price of books, but leave the quantity of labor employed unchanged.
B) raise the price of agricultural commodities and raise the price of books, and increase the quantity of labor employed.
C) raise the price of agricultural commodities and raise the price of books, and decrease the quantity of labor employed.
D) raise the price of agricultural commodities and raise the price of books, but leave the quantity of labor employed unchanged.

Question 26

The Production Possibilities Frontier represents

A) All consumption good allocations in an Edgeworth box that are exchange efficient.
B) all input allocations in an Edgeworth box for inputs that are input efficient.
C) All possible combinations of consumption goods that can be produced in an economy given the economy's available supply of inputs.
D) the different combinations of capital and labor inputs that will produce a given level of output for a particular good.

Question 27

The slope of the Production Possibilities Frontier is

A) The marginal rate of technical substitution.
B) The marginal revenue product.
C) The marginal rate of substitution.
D) The marginal rate of transformation.

Question 28

Which of the following statements is incorrect?

A) To be efficient, a competitive equilibrium must allocate goods to consumers so that no reallocation of the goods could make all consumers better off.
B) To be efficient, a competitive equilibrium must allocate inputs among firms so that no reallocation of inputs would result in a higher output of all goods.
C) To be efficient, a competitive equilibrium must satisfy substitution efficiency.
D) To be efficient, a competitive equilibrium must satisfy output efficiency.

Question 29

The general equilibrium effects of an excise tax on gasoline which would then be used to purchase military equipment would tend to

A) raise the price of energy and the price of military equipment, but not have an effect of the quantity of labor employed.
B) raise the price of energy and the price of military equipment, but lower the price of labor.
C) lower the price of energy and the price of military equipment, but not have an effect of the quantity of labor employed.
D) raise the price of energy and the price of military equipment, and increase the quantity of labor employed.

Question 30

To begin with,John has 6 units of Good X and Jane has 3 units of Good X.If X is measured horizontally in an Edgeworth box,then how wide should the Edgeworth box be?

A) 3 units
B) 6 units
C) 9 units
D) 18 units

Question 31

Firm X produces output and Firm Y produces output using capital,K,and labor,L,as inputs.Firm X has marginal rate of technical substitution MRTS^x_K,L = K_x/L_x,while firm Y has marginal rate of technical substitution MRTS^y_K,L = 9K_y/L_y. Which of the following allocations satisfies input efficiency?

A) Firm X has 5 units of K and 3 units of L, and Firm Y has 3 units of K and 1 unit of L.
B) Firm X has 5 units of K and 5 units of L, and Firm Y has 1 unit of K and 9 units of L.
C) Firm X has 9 units of K and 1 units of L, and Firm Y has 5 units of K and 5 units of L.
D) Firm X has 5 units of K and 5 units of L, and Firm Y has 1 unit of K and 3 units of L.

Question 32

Exchange efficiency means

A) that we can reallocate a fixed basket of consumption goods among consumers in a way that makes all consumers better off.
B) that we cannot reallocate a fixed stock of inputs among firms so that we can simultaneously expand the output of all goods produced in an economy.
C) that we cannot reallocate a fixed basket of consumption goods among consumers in a way that makes all consumers better off.
D) that we can reallocate a fixed stock of inputs among firms so that we can simultaneously expand the output of all goods produced in an economy.

Question 33

Identify the truthfulness of the following statements. I.The contract curve must contain the initial endowment point.
II)All points on the contract curve are economically efficient.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 34

The input contract curve represents:

A) All consumption good allocations in an Edgeworth box that are exchange efficient.
B) all input allocations in an Edgeworth box for inputs that are input efficient.
C) All possible combinations of consumption goods that can be produced in an economy given the economy's available supply of inputs.
D) the different combinations of capital and labor inputs that will produce a given level of output for a particular good.

Question 35

Two individuals,A and B,consume two goods, and Consumer A initially has 3 units of and 2 units of Consumer B initially has 5 units of and 6 units of .Also,for Consumer A the and for Consumer B the .Does this initial allocation of and represent an efficient allocation?

A) Yes
B) No, because both consumers could be made better off by giving A more and less .
C) No, because both consumers could be made better off by giving A more and less .
D) Cannot be determined from the given information.

Question 36

Two individuals,A and B,consume two goods, and .Together they have 4 units of and 8 units of .For Consumer A the and for Consumer B the .Which of the following allocations is an efficient allocation of goods and ?

A) Consumer A has 5 units of and 3 units of , and Consumer B has 3 units of and 1 unit of
B) Consumer A has 3 units of and 5 units of , and Consumer B has 1 unit of and 3 units of
C) Consumer A has 2 units of and 6 units of , and Consumer B has 6 units of and 2 units of
D) Consumer A has 7 units of and 2 units of , and Consumer B has 1 unit of and 6 units of

Question 37

If each of the two players represented in an Edgeworth box has Cobb-Douglas indifference curves,then the contract curve will be

A) The vertical axis.
B) the diagonal line that begins at the opposite corners of the two players' origins and divides the box into two equal triangles.
C) the series of tangency points where the two players' indifference curves have but one point in common.
D) the horizontal axis.

Question 38

When a fixed stock of consumption goods cannot be reallocated among consumers in an economy without making at least some consumers worse off,the allocation satisfies

A) exchange efficiency.
B) input efficiency.
C) substitution efficiency.
D) Walras' Law.

Question 39

In an Edgeworth box,apples are measured along the horizontal axes,and oranges are measured along the vertical axes.Player 1 is in the lower left-hand corner; player 2 is in the upper right-hand corner.Player 1 likes apples but gets no utility from the consumption of oranges.Player 2 likes oranges but gets no utility from the consumption of apples.In the initial endowment,Player 1 has 5 apples and 4 oranges.Player 2 also has 5 apples and 4 oranges.What is the contract curve?

A) All points along the horizontal axis.
B) All points along the vertical axis.
C) All points to the right and below the initial endowment point.
D) The point where Player 1 has 10 apples and 0 oranges, and Player 2 has 8 oranges and 0 apples.

Question 40

In an Edgeworth box the line through all of the points that represent efficient allocations of two goods is called

A) the core.
B) the contract curve.
C) the efficiency curve.
D) the Pareto curve.

Question 41

**Reference: Use the following table to answer the next three questions (42-44).
*Which of the following statements about the table above is correct?

A) The East has a comparative advantage in the production of both goods.
B) The East has a comparative advantage in the production of Food and the West has a comparative advantage in the production of Clothing.
C) The East has a comparative advantage in the production of Clothing and the West has a comparative advantage in the production of food.
D) The West has a comparative advantage in the production of both goods.

Question 42

The meaning of absolute advantage in economic terms is that

A) one country can produce more of all goods than another country.
B) one country can produce more of a good than another country.
C) one country is relatively more efficient in producing a good than another country.
D) one country has a factor endowment allowing it to produce one good more efficiently.

Question 43

If country A has an absolute advantage over country B in the production of good X,then

A) the opportunity cost of producing X in country A is lower than in country B.
B) the opportunity cost of producing X in country A is higher than in country B.
C) good X can be produced in country A using fewer inputs than in country B.
D) good X can be produced in country B using fewer inputs than in country B.

Question 44

The significance of the First Fundamental Theorem of Welfare Economics is that:

A) even if the economy is in competitive general equilibrium, significant intervention will be required to bring about economic efficiency.
B) there is a possibility that an economy could simultaneously attain an efficient allocation and one in which the resulting distribution of utility is in some sense equitable.
C) Even though households and firms behave independently and each pursues its own self-interest, the resulting equilibrium is efficient in the sense that it exploits all possible mutually beneficial gains from trade or from reallocation of inputs.
D) resources are scarce in the economy and so must be managed for the long term.

Question 45

Identify the truthfulness of the following statements. I.If country A has a comparative advantage over country B in the production of good X,then the opportunity cost of producing good X in country A is lower than in country B.
II)If country A has a comparative advantage over country B in the production of good X,then country A cannot gain from trade with country B.

A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question 46

**Reference: Use the following table to answer the next three questions (42-44).
*Which of the following statements about the table above is correct?

A) The East has an absolute advantage in the production of both goods.
B) The East has an absolute advantage in the production of Food while the West has an absolute advantage in the production of Clothing.
C) The East has an absolute advantage in the production of Clothing while the West has an absolute advantage in the production of Food.
D) The West has an absolute advantage in the production of both goods.

Question 47

The term Pareto efficient means that there is no alternative,feasible allocation of goods and inputs

A) that would make all consumers better off without hurting some consumers.
B) that would make any consumers better off without helping some consumers more than others.
C) that would make any consumers better off without hurting some consumers.
D) that would make any consumers worse off without helping some consumers.

Question 48

**Reference: Use the following table to answer the next three questions (42-44).
*In above table,what is the opportunity cost of producing one additional unit of food in the West?

A) 3 units of clothing
B) 2 units of food
C) unit of food
D) unit of clothing

Question 49

The idea of comparative advantage is that

A) each country can gain from trade as long as the opportunity cost of producing one good compared with another good is different between countries.
B) every country can gain from trade as long as all countries can produce roughly the same quantity of each good.
C) every country can gain from trade as long as the opportunity cost of producing one good compared with another good is the same as for other countries.
D) every country can gain from trade as long as the absolute amount of exports equals imports.

Question 50

Exchange efficiency,input efficiency,and substitution efficiency are satisfied when ______________________.This result is known as ______________.

A) free trade occurs; Walras Law.
B) all markets are at a general competitive equilibrium; Walras Law.
C) all markets are at a general competitive equilibrium; the First Fundamental Theorem of Welfare economics.
D) resources are scarce; the First Fundamental Theorem of Welfare economics.

Question 51

The idea of comparative advantage tends to imply that

A) countries as a whole can be made better off through free trade and all segments of society will benefit.
B) the countries who have greater resources will earn the greatest benefit from allowing free trade.
C) when one country can produce more of a good than another country, that country should specialize in the production of that good.
D) countries as a whole can be made better off through free trade, but individuals within that country could be hurt by trade if not compensated by the groups or individuals who are made better off by trade.

Question 52

The marginal rate of transformation where goods X and Y are produced by an economy using capital and labor as inputs equals

A) X/Y.
B) w/r, where w is the wage and r is the rental rate of capital.
C) MP_L/MP_K, where L stands for labor and K stands for capital.
D) MC_X/MC_Y

Question 53

Gains from free trade are realized when countries specialize in the production of goods

A) for which they have a comparative advantage.
B) which they can produce for low costs.
C) for which they have an international reputation for excellence.
D) which they can produce for a profit.

Question 54

The significance of the Second Fundamental Theorem of Welfare Economics is that:

A) even if the economy is in competitive general equilibrium, significant intervention will be required to bring about economic efficiency.
B) there is a possibility that an economy could simultaneously attain an efficient allocation and one in which the resulting distribution of utility is in some sense equitable.
C) Even though households and firms behave independently and each pursues its own self-interest, the resulting equilibrium is efficient in the sense that it exploits all possible mutually beneficial gains from trade or from reallocation of inputs.
D) resources are scarce in the economy and so must be managed for the long term.

Question 55

Any _________________ allocation of goods and inputs can be attained as a general competitive equilibrium through a judicious ___________ of the economy's___________________.This result is known as_____________

A) arbitrary, allocation, resources; Walras Law.
B) equitable, allocation, goods; The First Fundamental Theorem of Welfare Economics
C) efficient, allocation, scarce supplies of resources; the First Fundamental Theorem of Welfare economics.
D) efficient, allocation, scarce supplies of resources; the Second Fundamental Theorem of Welfare economics.

Question 56

In a competitive general equilibrium,which of the following relations will not be true?

A) MRS_X,Y = MRT_X,Y.
B) MRT_X,Y = MC_X/MC_Y.
C) MRS_X,Y = P_X/P_Y.
D) MRT_X,Y = w/r.