Exam 12: General Equilibrium and the Efficiency of Perfect Competition

What three decisions do firms make simultaneously?

Explain the difference between partial equilibrium analysis and general equilibrium analysis.

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?

How is it that economists can claim that perfectly competitive markets give people what they want?

Why are perfectly competitive markets considered efficient?

What is efficiency?

Comment on the following statement. "Once general equilibrium is achieved this will result in a long-run equilibrium as well."

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

Explain the condition where society would be better off when more of a good is produced.

If all the assumptions of perfect competition hold, the result is an efficient, or Pareto optimal, allocation of resources. What is necessary to prove this?

What is meant by market failure?

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

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?

What assumptions lead to the conclusion that that the allocation of resources among firms is efficient.

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

What is general equilibrium?

What is imperfect competition?

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

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?

Define "externality." Give an example of an external cost. Explain why resources will not be allocated efficiently if externalities are present. How can the problem of externalities be addressed?