The first theorem of welfare economics requires:
A)continuous budget lines.
B)the presence of externalities in consumption.
C)smooth and convex indifference curves.
D)the presence of two consumers with unambiguous preferences.

Question

Quizplus · Accepted Answer

The first theorem of welfare economics, which states that under certain conditions a competitive market will lead to a Pareto efficient allocation of resources, requires smooth and convex indifference curves among other assumptions. This ensures that consumers' preferences are well-behaved, meaning they prefer more of a good to less and that their rate of substitution between goods diminishes as they consume more of one good relative to another.

The First Theorem of Welfare Economics Requires