Exam 16: General Equilibrium and Economic Efficiency

Use the following statements to answer this question. I. A nation may have a comparative advantage in the production of a good without having an absolute advantage in the production of any goods. II. A nation may have a comparative advantage in the production of two or more goods.

A move from one point on a contract curve to another point on the contract curve will make

Two individuals, Dave and Bob, consume two goods, X and Y. The utility functions for the two individuals are given as: Bob's utility function: U_B = 30X^0.25Y^0.75 Dave's utility function: U_D = 50X^0.5Y^0.5 Bob is currently consuming 5 units of X and 10 units of Y. Dave is currently consuming 12 units of X and 8 units of Y. The current prices of X and Y are $10 and $15, respectively. a. Determine the marginal rate of substitution for each individual. b. In light of the information given above, have the two individuals achieved exchange equilibrium? Would it be possible to make one individual better off without harming the other? If the individuals have achieved exchange equilibrium, are other equilibrium combinations of X and Y between the individuals possible?

Suppose an economy produces milk and honey, and milk is plotted along the horizontal axis of the production possibilities frontier. The MRT is 2 at the current point of production. If the amount of milk produced is reduced by two units in order to produce one more unit of honey, then:

On the planet Economus, there are only two goods in the economy. One of the goods is econoapples. The supply of econoapples is: = 30 + P_A - P_S. The second type of good is the econoseed. The supply of econoseeds is: = 60 - P_A + P_S. The demand for econoapples is: = 15 - P_A + 4 P_S. The demand for econoseeds is: = 45 + P_A - P_S. Determine the equilibrium price and quantity of each good in the Economus economy. Suppose the world government of Economus implements a $1 tax on econoapples. Do econoapple consumers suffer any burden of the tax? Are econoseed consumers affected by the econoapple tax? How much tax revenue does the tax policy generate?

Locating a point on a utilities possibilities frontier gives you information about

The U.S. and Mexico can produce the amounts of computer chips and textiles indicated in the table below with one unit of land. Each country has 10 units of land. Does either country have an absolute advantage? Which country has a comparative advantage in chip production? Which country has a comparative advantage in textile production? Is it possible for the two countries to benefit from trade?

One day when Gilligan was diving in the lagoon he came across a gigantic oyster. Gilligan loved raw oysters so he pried the mollusk from the rocks and hastily came ashore. When he pried open the oyster he was surprised to find a huge gray pearl. Gilligan was thrilled at the sight of the large pearl and his immediate thought was to go and tell his friends about it. But then he reconsidered. To whom would he give the pearl? He thought it was pretty, but owning the pearl would not give him any satisfaction. When he thought about it, he realized that the Skipper, Mr. and Mrs. Howell, the Professor, Ginger and MaryAnn would all like to have the pearl. What should he do? He could not give the one pearl to all of his friends. Maybe he could find some more pearls. With this in mind he dove back into the lagoon and returned to the spot where he found the large oyster. Much to his surprise, barely hidden from view was a small colony of oysters. He pried each of them from the rocks and took them all ashore. Inside of each oyster he found a large pearl. Each pearl was as beautiful as the one that he had first discovered. When he had finished opening the oysters he counted his pearls. "One, two, three, four, five. That's it five pearls." But that's not enough. He did not need a pearl for himself, but he had six friends and only five pearls. Gilligan thought about this problem at least an hour. He finally stood and threw all five pearls back into the lagoon. "If everyone cannot have a pearl, then no one should have a pearl," he thought to himself as he watched the ripples from the pearls spread out across the lagoon. a. Define Pareto optimality. b. Was Gilligan's solution to his problem Pareto optimal? If so, explain why. If not, explain why not.

The contract curve in an Edgeworth Box diagram illustrates

The slope of the production possibilities frontier is defined to be the marginal rate of

Once a point on a contract curve has been chosen,

If the initial distribution of two goods between two people is Pareto optimal, which of the following statements is TRUE?

Sarah and Jane are two representative individuals living in an economy that produces two goods, X and Y. Sarah's and Jane's utility functions are given as: Sarah: U^S = 100X^0.5Y^0.5 Jane: U^J = 50X^0.4Y^0.6 The market determined prices of X and Y are $10 and $20, respectively. Current outputs are 58 units of X per time period and 36 units of Y. Jane's current income is $600 per time period, while Sarah's income is $700 per time period. a. Write expressions for Sarah and Jane's marginal rates of substitution. b. Determine the quantities of X and Y that Sarah and Jane should consume in equilibrium. c. Do the values calculated in part (b) satisfy the conditions for equilibrium in exchange? Explain using numbers. d. Examine your answers in parts (b) and (c). If equilibrium has not been achieved, what would be necessary to reach equilibrium? If equilibrium has been achieved, comment on the process by which equilibrium was reached.

The United States and Brazil are competitors in the world soybean market. In the late 1960s and early 1970s, the Brazilian government developed regulations designed to encourage Brazilian soybean production and exports. An unanticipated effect of the Brazilian regulations was to stimulate U.S. soybean production and exports. The type of economic analysis that would explain and predict these effects is called

Which of the following is not a cause of market failure?

Scenario 16.1: Irrespective of the amount of cheese doodles and pretzels that Sam consumes, his marginal rate of substitution of cheese doodles for pretzels is 2. Also, irrespective of the amount of cheese doodles and pretzels that Sally consumes, her marginal rate of substitution of cheese doodles for pretzels is 3. -Refer to Scenario 16.1. Initially Sam and Sally are allocated 10 cheese doodles and 10 pretzels each. Which of the following statements are TRUE?

Which of these is NOT an exercise in general equilibrium analysis?

The egalitarian view of equity would lead to:

Gasoline and bicycles are substitutes in consumption. Suppose we increase the federal gasoline tax to $1 per gallon. What are the initial changes that result from the tax as these markets adjust to a new general equilibrium?

What is TRUE about every point along a production possibilities frontier?