Deck 17: General Equilibrium and Market Efficiency

Question 1

Given an initial allocation of resources that is off the consumption contract curve, in a perfect market environment without externalities and imperfect information,

A)one can end up at any point on the contract curve.
B)one can end up at only one spot on the contract curve.
C)both indifference curves could move to a higher level of utility.
D)only one of the indifference curves could move to a higher level of utility.

Answer 1

C

Question 2

If one is on the contract curve

A)the allocation is not Pareto optimal.
B)the indifference curves of both consumers are crossing.
C)no further voluntary trade will occur.
D)further beneficial trades can occur.

Answer 2

C

Question 3

According to the second welfare theorem

A)when an allocation is efficient it also achieves equity.
B)the issues of equity and efficiency are separate in that the system can be on the contract curve but might not be considered equitable.
C)equity cannot be analyzed in the Edgeworth box model because it shows only possible trades toward efficiency.
D)the welfare of individuals is not based on material goods.

Answer 3

B

Question 4

A Pareto preferred transaction is one where

A)the loser in a transaction loses less than the gainer gains.
B)all must gain welfare compared with the pre-transaction position.
C)no one loses and at least one person gains in the transaction.
D)the consumers must have moved to the contract curve.

Question 5

If one is inside the production possibilities frontier,

A)production of one commodity can be produced but not more of both.
B)more resources are needed to move to the frontier.
C)production is not on the production contract curve.
D)All of these are true

Question 6

Given an initial endowment of factor inputs,

A)there is only one efficient level of outputs.
B)there are many efficient output levels for the firms.
C)a production possibility curve can be determined without knowing the contract curve.
D)the midpoint on the production contract curve is the most equitable point.

Question 7

In the Edgeworth box shown below,

A)there is more food demanded than is available.
B)there is more clothing demanded than is available.
C)the relative prices shown will bring equilibrium without changing.
D)there is less food demanded than is available.

Question 8

The rate at which one input can be traded for another at a point along the production possibilities frontier is called the

A)marginal rate of transformation.
B)marginal rate of technical substitution.
C)input price ratio.
D)output price ratio.

Question 9

In an economy, which of the following is not a source of inefficiency?

A)Monopoly
B)Public Goods
C)International Trade
D)Externalities

Question 10

In competitive equilibrium

A)the MRS of all consumers varies if preferences vary.
B)the MRT of all producers varies depending on the production function of the firm.
C)it is impossible to make anyone better off without making someone else worse off.
D)All of these are true

Question 11

In the Edgeworth box diagram, if the initial allocation of consumer goods is off the contract curve, then we can be sure that

A)both parties can be made better off.
B)trade will occur if allowed and transactions costs are high.
C)the initial allocation is unfair.
D)the MRS of each consumer is the same.

Question 12

On the consumption contract curve

A)supply equals demand of both goods.
B)all allocations are Pareto optimal.
C)there will be no further voluntary exchange.
D)All of these are true.

Question 13

In equilibrium with an Edgeworth production box

A)MPK/MPL = PL/PK.
B)one is on the contract curve.
C)the production of one good could increase without decreasing the production of the other.
D)MPK * MPL = PL * PK.
E)All of these are true

Question 14

A tax on all goods consumed

A)would not cause distortions if all consumer goods are taxed at the same rate.
B)would be more efficient than an income tax.
C)would cause distortions between consumer goods and other goods and services.
D)will increase the welfare of all consumers.

Question 15

According to the exchange model of production, when two firms are in competitive equilibrium

A)the MRTS for two firms will be equal.
B)the marginal products of capital and labor for each firm will be equal.
C)both firms will demand the same quantities of labor and capital.
D)the prices of labor and capital will be at the lowest possible level.

Question 16

An allocation of resources is Pareto optimal if

A)it is possible to make one person better off without making at least some others worse off.
B)no further mutually beneficial exchange is possible.
C)it is below the contract curve.
D)it is possible to make everyone else better off.

Question 17

According to the text, if a policy is designed to move a production process toward efficiency when pollution exists, the best tax is a

A)lump sum tax on pollution.
B)progressive income tax.
C)proportional income tax.
D)sales tax.

Question 18

The consumption contract curve

A)is always a straight line.
B)will always have the same MRS.
C)is the locus of Pareto optimal points.
D)is always negatively sloped.

Question 19

According to the invisible hand theorem, as stated in the text,

A)non-market forces can prevent the markets from guiding consumers to the contract curve.
B)an equilibrium produced by competitive markets will exhaust all gains from exchange.
C)government interaction is sometimes needed as an invisible hand to lead the economy toward efficiency.
D)even non-competitive markets are able to achieve Pareto efficient outcomes.

Question 20

In the Edgeworth diagram model, a doubling of the prices will

A)double the dollar value of each consumer's initial endowment.
B)double the quantities of each consumer's initial endowment.
C)cut in half the dollar value of each consumer's initial endowment.
D)decrease the dollar value of each consumers' initial endowment.

Question 21

What is wrong in an economy when society can transform 1,000 apples into a tent or a tent into 1,000 apples, but the marginal rate of substitution of apples for tents by consumers is 500? Explain how the market automatically will solve this problem.

Question 22

The diagram below shows the production possibilities frontier (PPF) for a country that produces guns (G) and butter (B). Most people in the country prefer guns, so in the absence of international trade, point A represents the combination of G and B that maximizes welfare. The slope of the PPF at point A is equal to -2. What is the opportunity cost of 1 unit of guns before trade? What is the opportunity cost of 1 unit of butter?

Question 23

The diagram below shows the general equilibrium model for a small economy. For this economy, the economically efficient allocation of resources occurs at point

A) A.
B) B.
C) C.
D) D.

Question 24

According to the General Equilibrium Model, an economically efficient allocation of resources occurs when

A)the producer's MRT = the consumer's MRS.
B)all consumers have the same MRS.
C)no welfare-improving trades can be made.
D)All of these exist.

Question 25

If there is a negative externality involved in producing good X, then

A)the production possibility curve will be too steeply sloped toward good X.
B)a subsidy to the producer of good X can correct the inefficiency involved.
C)engaging in international trade will solve the inefficiency.
D)None of these is true.

Question 26

In the diagram below, the following would be a possible explanation for the difference between PPF1 and PPF2. (Assume the starting point is with all butter and no guns.)

A)A technological improvement in the production of butter.
B)A technological improvement in the production of guns.
C)A dramatic shock to the resources needed to produce butter.
D)A technological improvement in the production of butter and guns.

Question 27

The diagram below shows the production possibilities frontier (PPF) for a country that produces guns (G) and butter (B). Most people in the country prefer guns, so in the absence of international trade, point A represents the combination of G and B that maximizes welfare. The slope of the PPF at point A is equal to -2.
Suppose that on the world market the price of guns is $1,000 per unit and the price of butter is $3,000 per unit. Given these terms of trade in the world markets, would this country be able to increase its consumption from its initial "no-trade" equilibrium? Describe a trade that would be beneficial for the country.

Question 28

The diagram below shows the general equilibrium model for X and Y for a small hypothetical economy. Point A in this diagram represents positions where

A)there is an excess supply of good X.
B)there is an excess demand for good X.
C)the economy is at an economically efficient allocation of resources.
D)good Y costs less to produce than its production cost at pointC.

Question 29

When taxes or subsidies on a particular product are introduced into the general equilibrium model we can be sure that

A)taxes make the taxed product appear too expensive to its producer.
B)subsidies make the product appear too cheap to its producer.
C)we get too much of the subsidized product and too little of the taxed product.
D)a more fair allocation of resources is possible.

Question 30

Which statement is true of a tax levied on one product in a general equilibrium model?

A)Taxes always distort the most efficient flow of resources in an economy.
B)Taxes cannot distort efficient resource flows because they become part of the price.
C)Taxes on producers distort efficient resource flows but taxes on consumers do not affect efficiency.
D)Taxes will hurt efficiency unless they are designed to offset other inefficiencies in the system.

Question 31

Which of the following is true of The Invisible Hand Theorem?

A)Monopoly pricing will not distort efficiency as long as consumers are willing to pay the prices of the monopolists.
B)There can be no taxes of any kind.
C)Any position on the consumer contract curve can be efficient.
D)The slope of the production possibilities curve is not affected by movements along the production contract curve.

Question 32

Compare Pareto optimality with the utilitarian view that says we are better off when the overall gain in utility exceeds the overall loss in utility by the consumers. What are the effects of the differences for policy? Can this concept be applied to public goods?

Question 33

Sketch a typical consumption contract curve in an Edgeworth box for you and she. The two products should be apples and tents. Identify two consumption baskets where you and she are off the contract curve. Label the first point (a) where you value apples much more than she does; label the second point (b) where you value apples much less than she does.

Question 34

The diagram below shows the production possibilities frontier (PPF) for a country that produces guns (G) and butter (B). Most people in the country prefer guns, so in the absence of international trade, point A represents the combination of G and B that maximizes welfare. The slope of the PPF at point A is equal to -2.
Over the long run, do you think this country would be better off by shifting its production towards guns or butter? Please identify the most efficient production point in the PPF with trade. What would be the ratio of the prices at that point?

Question 35

The slope of the contract curve for two consumers is determined by the

A)relative prices of goods.
B)absolute prices of goods.
C)marginal rates of substitution of the two trades.
D)income of the two traders.

Question 36

When the two-good production and trade models are extended from a given country to the entire world

A)the price of the exported good falls for the country going global.
B)the cost of producing the exported good rises for the country going global.
C)the price of the imported good falls to the country's consumers.
D)the price of both goods rises for the country going global.

Question 37

Sketch an Edgeworth production box where the demand for labor is greater than its supply and the supply of capital is greater than its demand.

Question 38

Three main conditions are necessary for general equilibrium to hold in the market economy. The first requires that all consumers are in equilibrium meaning that all beneficial exchanges have been made between them. The second is that all inputs are employed in their best use meaning that costs are as low as possible for everything being produced. The third condition requires that

A)the right mix of goods is being produced.
B)the distribution of income is done according to the societal values so that all the contract curves can be reached.
C)the production possibilities frontier move outward indicating economic growth.
D)absolute price levels do not change.

Question 39

Compared to PPF1, along with PPF2

A)the economy can produce more butter.
B)the economy can produce more guns.
C)the opportunity cost of producing butter is more than before.
D)All of these choices are correct.

Question 40

Which type of the market failure exists when the effect of one party's economic activities on another party is not taken into account by the price system?

A)Imperfect information
B)Externalities
C)Public goods
D)Imperfect competition

Question 41

You live in a world where the marginal rate of substitution of food for clothing is two and the price ratio between food and clothing is one. Your world also has labor and capital that has marginal products respectively of two and five. The price of capital is ten and the price of labor is 8. Finally, your world can transform two units of food into one unit of clothing or vice versa. Assuming that all the conditions of general equilibrium are present, what will happen in the various sectors of the economy to bring about general equilibrium?

Question 42

If Sam and Sally are off their contract curve for dining hall tickets and economics texts and they meet to move to the contract curve, describe the conversation that would likely take place.