Deck 10: General Equilibrium and Economic Welfare

Question 1

The general equilibrium analysis of a minimum wage applied to only some sectors of the economy suggests that

A) workers in all sectors will face increased wages.
B) some workers in the covered sectors will lose their jobs and remain unemployed.
C) some workers originally employed in the covered sectors will move to the uncovered sectors, driving down wages in the uncovered sectors.
D) all workers will be worse off.

Answer 1

C

Question 2

The saying "what's that got to do with the price of tea?" reflects

A) two markets where general equilibrium analysis would be most useful.
B) two markets where general equilibrium analysis likely won't be very useful.
C) two markets where the products are clearly closely related.
D) two markets where firms are incredibly greedy.

Answer 2

B

Question 3

Assume Congress holds a hearing on the impact of gasoline prices on the price of corn.Most likely,this hearing will be

A) a partial equilibrium analysis.
B) a general equilibrium analysis.
C) about consumer rather than producer surplus.
D) an analysis of efficiency.

Answer 3

A

Question 4

If firms are producing efficiently,but consumers can reallocate goods amongst themselves,

A) the equilibrium is not efficient.
B) the equilibrium is efficient.
C) the consumers are behaving irrationally.
D) the firms are too greedy.

Question 5

General equilibrium analysis is the study of

A) how an equilibrium is determined in all markets simultaneously.
B) how an equilibrium is determined in all closely related markets.
C) the effects of a change in a market, and all spillover effects in all related markets.
D) Any of the above.

Question 6

Reparations for slavery in the United States would

A) be consistent with the Pareto principle.
B) be inconsistent with the Pareto principle.
C) have nothing to do with the Pareto principle.
D) be unconstitutional.

Question 7

A general equilibrium analysis of a price change in the corn chip market would include an investigation of the impacts in

A) the television market.
B) the coffee market.
C) the salsa market.
D) All of the above.

Question 8

Joe and Rita each have some milk and cookies (Milk on the horizontal axis).Joe's MRS of cookies for milk is 2.Rita's MRS of cookies for milk is 4.Which of the following statements is TRUE?

A) No gains from trade are possible.
B) Both Rita and Joe can be made better off if Rita gives Joe some cookies in exchange for milk.
C) Rita and Joe are on the contract curve.
D) Both Rita and Joe can be made better off if Joe gives Rita some cookies in exchange for milk.

Question 9

There are two closely related crops,X and Y,with the following demand functions Q_X = 180 - 2P_X + P_Y and Q_Y = 150 + P_X - P_Y where Q_X is the quantity of X,P_X is the price of X,Q_Y is the quantity of Y,and P_Y is the price of Y.These two crops are grown in two widely separated countries so there is no interrelationship between the supply curves.The short-run perfectly inelastic supply for X is 200 while the short-run perfectly inelastic supply for Y is 100.In equilibrium,the prices are

A) P_X = 30, P_Y = 80
B) P_X = 40, P_Y = 60
C) P_X = 60, P_Y = 120
D) P_X = 80, P_Y = 130

Question 10

Joe and Rita each have some cookies and milk.Joe is willing to trade 2 cookies for an additional ounce of milk.Rita is willing to trade 4 cookies for an additional ounce of milk.If trading is possible,which of the following is most likely to occur?

A) Joe will give some milk to Rita in exchange for cookies.
B) Rita will give some milk to Joe in exchange for cookies.
C) No trade will take place since they both prefer to have more milk and fewer cookies.
D) There is not enough information to make any predictions.

Question 11

There are two closely related crops,X and Y,with the following demand functions Q_X = 180 - 2P_X + P_Y and Q_Y = 150 + P_X - P_Y where Q_X is the quantity of X,P_X is the price of X,Q_Y is the quantity of Y,and P_Y is the price of Y.These two crops are grown in two widely separated countries so there is no interrelationship between the supply curves.The short-run perfectly inelastic supply for X is 150 while the short-run perfectly inelastic supply for Y is 100.In equilibrium,the prices are

A) P_X = 80, P_Y = 130
B) P_X = 40, P_Y = 65
C) P_X = 60, P_Y = 120
D) P_X = 30, P_Y = 80

Question 12

Moving away from the contract curve will

A) harm both parties.
B) harm only one of the parties.
C) harm at least one of the parties.
D) harm neither of the parties.

Question 13

The effects of a price change are always understated by a partial-equilibrium analysis when compared to a general-equilibrium analysis.

Question 14

Employing a general equilibrium approach,describe the effect of a new law that prohibits steel imports.

Question 15

If two or more markets are closely related,

A) a partial equilibrium analysis will tend to overstate the price impact of a supply shock.
B) a partial equilibrium analysis will tend to accurately predict the price impact of a supply shock.
C) a partial equilibrium analysis will tend to understate the price impact of a supply shock.
D) they should be analyzed concurrently but using partial equilibrium analysis alone.

Question 16

Suppose that the minimum wage covers all sectors of the economy; however,for unionized laborers,the minimum wage is ineffective.That is,the union wage is already above the minimum wage.Analyze the impact of an increase in the minimum wage on both the unionized and non-unionized labor markets.(Assume that the higher minimum wage is still ineffective in the unionized sector and that union and nonunion labor are substitutable.)

Question 17

Employers in a city must pay a specific tax of $t per hour worked by their employees while employers in the suburbs of the city do not have an employment tax.What does a general equilibrium approach predict regarding the wages and employment of both the city and suburban workers if the city decides to substantially reduce their employment tax rate?

A) Wages will increase in the city, but not in the suburbs, and employment will increase in both.
B) Wages will increase in both the city and the suburbs, but employment will fall in both.
C) Wages will increase in both the city and suburbs, employment will increase in the city, but decrease in the suburbs.
D) Wages will increase in both the city and the suburbs, employment will decrease in the city, but increase in the suburbs.

Question 18

When comparing partial equilibrium effects to general equilibrium effects one can conclude that

A) general equilibrium effects are always larger.
B) partial equilibrium effects are always larger.
C) the effects are of equal size.
D) one cannot determine before the fact which effect is greater.

Question 19

Gains from trade can only occur when

A) marginal rates of substitutions differ across people.
B) marginal rates of substitution are equal across people.
C) indifference curves are convex.
D) people find themselves on the contract curve.

Question 20

As opposed to general equilibrium analysis,partial equilibrium analysis looks

A) at an equilibrium and changes to it in a single, isolated market.
B) at how changes in all other markets effect a particular market.
C) at how equilibrium is determined in all markets simultaneously.
D) at either price or quantity movements.

Question 21

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Part of the contract curve can be found by connecting points

A) a and b.
B) a and c.
C) b and d.
D) c and d.

Question 22

Gains from trade will be possible as long as

A) levels of utility differ.
B) utility functions differ.
C) marginal rates of substitution differ.
D) endowments differ.

Question 23

Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 20 units of clothing but no food.Suppose each has the utility function U = F ∗ C.Derive the contract curve.

Question 24

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Point c is Pareto efficient because

A) the MRS's are equal.
B) the indifference curves are tangent.
C) no mutual gains from trade exist.
D) All of the above.

Question 25

Only individuals A and B live on a desert island where no production is possible.A is endowed with 12 units of good X and 18 units of good Y.B is endowed with 6 units of good X and 42 units of good Y.In the Edgeworth box,good X is measured on the horizontal axis.Individual A's utility function is U_A = 3XY so her MU_X = 3Y and her MU_Y = 3X.Individual B's utility function is UB = 10 so his and his MU_Y = 5 .Which of the following allocations are on the contract curve?

A) (X_A = 12, Y_A = 24), (X_B = 6, Y_B = 36)
B) (X_A = 10, Y_A = 28), (X_B = 8, Y_B = 32)
C) (X_A = 9, Y_A = 30), (X_B = 9, Y_B = 30)
D) None of the above.

Question 26

Gains from trade will be possible as long as

A) people have different endowments.
B) people place different values on some goods.
C) marginal rates of substitution are equal across individuals.
D) excess supply equals excess demand.

Question 27

The term "born with a silver spoon in his mouth" mistakenly implies

A) only monetary endowments allow one to trade with others.
B) only the wealthy are strong negotiators in trade.
C) endowments are physical.
D) endowments differ.

Question 28

When two people trade their initial endowments to a point on the contract curve,only the level of the endowments will determine the new allocation.

Question 29

Only individuals A and B live on a desert island where no production is possible.A is endowed with 15 units of good X and 17 units of good Y.B is endowed with 13 units of good X and 23 units of good Y.In the Edgeworth box,good X is measured on the horizontal axis.Individual A's utility function is U_A = 3XY so her MU_X = 3Y and her MU_Y = 3X.Individual B's utility function is UB = 10 so his and his MU_Y = 5 .Which of the following allocations are on the contract curve?

A) (X_A = 14, Y_A = 20), (X_B = 14, Y_B = 20)
B) (X_A = 15, Y_A = 17), (X_B = 13, Y_B = 23)
C) (X_A = 18, Y_A = 22), (X_B = 10, Y_B = 18)
D) None of the above.

Question 30

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.If the endowment is at point a,and trade is possible,which of the following points are possible equilibria?

A) a and b
B) a and c
C) b and d
D) c and d

Question 31

If two grade-school children willingly trade their lunches with one another,we can conclude that at least one of them preferred the other's lunch to his own.

Question 32

When two people are on the contract curve,the allocation of goods

A) cannot be improved.
B) is pareto efficient.
C) is such that neither individual can be made better off without making the other worse off.
D) All of the above.

Question 33

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Considering only the labeled points,point c is a possible equilibrium

A) only if it is the endowment.
B) only if point a is the endowment.
C) if either point a or b is the endowment.
D) only if point d is the endowment.

Question 34

If only two people are trading their endowments and no production is possible,then the equilibrium they reach will

A) be on their contract curve.
B) result in unequal marginal rates of substitution for the two people.
C) result in one person being worse off than with his or her endowment.
D) All of the above.

Question 35

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Point a is NOT Pareto efficient because

A) Al's MRS exceeds Bruce's MRS.
B) the point is not near the center of the box.
C) Al's indifference curve is not far enough away from the origin.
D) All of the above.

Question 36

Explain why having different marginal rates of substitution is necessary for trade to occur.

Question 37

When considering trade of two goods between two people,if one person has all the endowment of both goods,this allocation

A) is never on a contract curve.
B) will result in trade so each person has all of one good.
C) will result in trade to a equal division of goods between the two people.
D) is Pareto efficient.

Question 38

Any point on the contract curve is Pareto efficient regardless of the initial endowment.

Question 39

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Points a and b

A) are most likely to reflect the final allocations after trading.
B) are least likely to reflect the final allocations after trading.
C) are equally likely to reflect the final allocations after trading than other points on the contract curve.
D) are definitely not the final allocations after trading.

Question 40

The above figure depicts the Edgeworth box for two individuals,Al and Bruce.If the endowment is at point a,and Al has no ability to bargain,the final allocation will be at point

A) a.
B) b.
C) c.
D) d.

Question 41

An initial allocation of goods is called a(n)

A) endowment.
B) inheritance.
C) pareto set.
D) general equilibrium goods set.

Question 42

Explain the logic behind the First Theorem of Welfare Economics.

Question 43

The so-called "death tax" might

A) aim to alter endowments so as to attain an inefficient outcome.
B) aim to alter endowments consistent with the First Theorem of Welfare Economics.
C) aim to alter endowments consistent with the Second Theorem of Welfare Economics.
D) aim to alter prices consistent with the First Theorem of Welfare Economics.

Question 44

The fact that at the competitive equilibrium nobody can be made better off without making someone else worse off implies that

A) the equilibrium is Pareto-efficient.
B) the equilibrium is not Pareto-efficient.
C) the prices need to adjust further.
D) further gains from trade are possible.

Question 45

Assume a government likes a particular equilibrium along the contract curve.It can achieve that equilibrium through competition and income redistribution.

Question 46

In a competitive market,prices adjust until all consumers find themselves

A) maximizing utility.
B) on the contract curve.
C) happy with their original endowment.
D) with many opportunities to gain from additional exchange.

Question 47

A competitive equilibrium is Pareto-efficient because at the competitive equilibrium,

A) prices have been allowed to adjust.
B) there are no further gains from trade.
C) the final outcome is different from the original inefficient endowment.
D) all members of society can be made better off.

Question 48

The First Theorem of Welfare Economics can be expressed as

A) the competitive equilibrium results only when no transactions costs exist.
B) the competitive equilibrium does not involve reallocation of endowments.
C) any efficient allocations can be achieved by competition.
D) the competitive equilibrium is efficient.

Question 49

A government policy of providing free public K-12 education is most consistent with

A) Pareto-efficiency.
B) the First Theorem of Welfare Economics.
C) the Second Theorem of Welfare Economics.
D) the contract curve.

Question 50

The fact that any Pareto-efficient equilibrium can be achieved through competition by adjusting endowments is called

A) the Second Welfare Theorem.
B) the First Welfare Theorem.
C) the Third Welfare Theorem.
D) That is not possible.

Question 51

For a given set of prices,two consumers choose bundles that are off the contract curve.In a competitive market,

A) prices will adjust until the consumers choose bundles that are on the contract curve.
B) the indifference curves will shift back to the contract curve.
C) the contract curve will shift to connect these bundles.
D) no adjustments need to be made.

Question 52

Any competitive equilibrium is Pareto-efficient because,with a competitive equilibrium,

A) the marginal rates of substitution are equal for all consumers.
B) the price line is the contract curve.
C) mutual gains from trade exist.
D) the slope of the price line equals the ratio of the MRS for all consumers.

Question 53

A competitive equilibrium is not Pareto efficient if some members of society are unable to afford a necessary good.

Question 54

In a competitive marketplace,prices adjust until

A) MRS's are equal to zero.
B) excess supply equals excess demand equals zero in all markets.
C) each consumer has maximized utility subject to his budget constraint.
D) all firms earn zero profit.

Question 55

True or false? The Edgeworth box version of inter-personal trade requires the individuals to be in close proximity of one another.

A) True, that way they can see each other's endowments and prices.
B) False, begin in close proximity is not required for mutually beneficial trade to occur in the Edgeworth box.
C) True, the Edgeworth box only works when there folks see "eye-to-eye."
D) False, although prices are only valid if they are communicated in person.

Question 56

The above figure depicts the Edgeworth box for two consumers,Al and Bruce.Explain why point "a" cannot be a competitive equilibrium.

Question 57

Explain why Robin Hood's practice of stealing from the rich to give to the poor is never Pareto efficient.

Question 58

Robinson starts out with 10 lobsters and 5 coconuts.Friday starts out with 10 lobsters and 15 coconuts.After trading,Robinson ends up with 8 lobsters and 10 coconuts.Robinson feels neither better nor worse off than when he started but cannot get Friday to agree to any more trades.Friday feels better off than when he started.Draw the Edgeworth box consistent with this story.

Question 59

Suppose two people start with an initial endowment and trade until they obtain a Pareto-efficient allocation with the corresponding price line.What happens when more people who have the same tastes and endowments as the original two traders are included in the Edgeworth box analysis?

A) The price line does not change.
B) The price line becomes flatter.
C) The price line becomes steeper.
D) The price line shifts up or down depending upon how many of each type of trader is included in the analysis.

Question 60

Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 20 units of clothing but no food.Suppose each has the utility function U = F ∗ C.The price of clothing is always $1.If the price of food is $3,does a competitive equilibrium exist? If not,what will happen to the price of food?

Question 61

Every point on the joint production possibilities frontier represents

A) an initial endowment.
B) inefficient production.
C) the marginal rate of substitution of goods for each producer.
D) at least one producer specializing in production.

Question 62

As more producers with differing marginal rates of transformation are added,the joint production possibility curve becomes

A) steeper.
B) flatter.
C) more convex to the origin.
D) smoother.

Question 63

Competition results in the efficient product mix because

A) producers are setting MRT equal to minus the price ratio while consumers are setting MRS equal to minus the price ratio ensuring that MRT will equal MRS.
B) consumers are on the contract curve.
C) the slope of the production possibility frontier will equal the slope of the contract curve.
D) the distribution of the final output is Pareto efficient.

Question 64

If pizza is measured on the horizontal axis and pretzels are measured on the vertical axis,the slope of the production possibility frontier at a given combination reflects

A) the total cost of producing that combination.
B) the total cost of producing that quantity of pizza in terms of pretzels.
C) the cost of making the last pizza in terms of pretzels.
D) the cost of making the last pretzel in terms of pizza.

Question 65

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Suppose each country is in competitive equilibrium prior to free trade being allowed.Once free trade is allowed,the price of food will be

A) two times the price of clothing.
B) equal to the price of clothing.
C) one-half the price of clothing.
D) somewhere between one-half the price of clothing and the price of clothing, depending upon the relative bargaining power of the two countries.

Question 66

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier has a kink because

A) each country has a constant marginal rate of transformation that differs from the other country.
B) each country has a marginal rate of transformation that varies with the product mix.
C) all production possibility frontiers have kinks.
D) the two countries have the same marginal rate of transformation.

Question 67

By saying that MRS = MRT,an economist means that

A) for all goods, the value that society places on the last unit produced equals the cost of making that unit.
B) for all goods, the value that a consumer places on the last unit consumed equals the value that all consumers would place on that unit.
C) society is able to produce more output of one good without reducing the output of any other good.
D) no other output mix is technically feasible.

Question 68

At a perfectly competitive equilibrium with production and trade,the slope of the production possibility curve will be

A) equal to the slope of the price line faced by the consumers.
B) steeper than the slope of the price line faced by consumers.
C) flatter than the slope of the price line faced by consumers.
D) either steeper or flatter than the price line faced by the consumers, depending upon the relative preferences of the consumers.

Question 69

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Once free trade is allowed,Canada will produce

A) no clothing.
B) 10 units of clothing.
C) 20 units of clothing.
D) 5 units of clothing.

Question 70

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier

A) will kink away from the origin at 20 units of food.
B) will kink toward the origin at 20 units of food.
C) will kink toward the origin at 10 units of food.
D) will kink away from the origin at 10 units of food.

Question 71

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Assuming that consumers place equal value on both of these goods and that free trade between these two countries is possible,gains from trade

A) are not possible.
B) exist because food is more expensive to produce in Canada than in the U.S.
C) exist because food is more expensive to produce in the U.S. than in Canada.
D) do not exist because the consumers in each country have set their marginal rate of substitution equal to their country's marginal rate of transformation.

Question 72

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier will have a slope of -1

A) only when 20-30 units of food are produced.
B) only when 10-20 units of food are produced.
C) only when 10-20 units of clothing are produced.
D) throughout the entire PPF.

Question 73

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.The United States has a comparative advantage in producing

A) food.
B) clothing.
C) food and clothing.
D) neither good.

Question 74

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Assuming free trade between these two countries,Canada will produce food

A) as long as any positive amount of food is demanded.
B) as long as more than 10 units of food are demanded.
C) as long as people are willing to give up at least 1 unit of clothing to get a unit of food.
D) as long as people are willing to give up more than 1/2 unit of clothing to get a unit of food.

Question 75

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier has a vertical intercept of

A) 10.
B) 20.
C) 30.
D) 50.

Question 76

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier has a horizontal intercept of

A) 10.
B) 20.
C) 30.
D) 50.

Question 77

In a perfectly competitive equilibrium with production and trade,which of the following results occur(s)?

A) Pareto-efficiency is obtained.
B) The First Welfare Theorem is satisfied.
C) There is efficiency in production.
D) All of the above.

Question 78

The ability to produce a good at a lower opportunity cost than someone else is called

A) competitive production.
B) comparative advantage.
C) selective advantage.
D) absolute advantage.

Question 79

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier

A) will have a slope of -3/4 over the entire frontier.
B) will have a slope of -2 when less than 20 units of food are produced.
C) will have a slope of -1 when less than 20 units of food are produced.
D) will have a slope of -1/2 when less than 20 units of food are produced.

Question 80

Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.If production occurs at the kink on the joint production possibility frontier,

A) the U.S. will specialize in food and Canada will specialize in clothing.
B) the U.S. will specialize in clothing and Canada will specialize in food.
C) each country will devote half of its resources to each industry.
D) joint output is minimized.