Question 1

Teresa and Jean-Pierre both consume the same goods in a pure exchange economy.Teresa is originally endowed with 9 units of good 1 and 6 units of good 2.Jean-Pierre is originally endowed with 91 units of good 1 and 14 units of good 2.They both have the utility function U(x1,x2)=x1/31x2/32.If we let good 1 be the numeraire,so that p1 =$1,then what will be the equilibrium price of good 2?

Accepted Answer

A)   $10
B)   $20
C)   $2
D)   $1
E)   $5 A

Question 2

Sheila and Ivan live in an isolated valley and trade with no one but each other.They consume only apples and oranges.Sheila has an initial endowment of 6 apples and 19 oranges.Ivan has an initial endowment of 18 apples and 20 oranges.For Sheila,the two goods are perfect substitutes,one for one.For Ivan,they are perfect complements,one for one.At all Pareto efficient allocations,

Accepted Answer

A)   Sheila must consume at least 25 oranges.
B)   the slopes of the two traders' indifference curves are the same.
C)   Ivan must consume 17.50 apples.
D)   Sheila must consume at least 15 oranges.
E)   Ivan must consume all of the apples. D

Question 3

Abduls utility is U(X A,Y A)=min{X A,Y A},where X A and Y A are his consumptions of goods X and Y respectively.Babettes utility function is U(X B,Y B)= X B Y B,where X B and Y B are her consumptions of goods X and Y.Abduls initial endowment is no units of Y and 7 units of X.Babettes initial endowment is no units of X and 6 units of Y.If X is the numeraire good and p is the price of good Y,then supply will equal demand in the market for Y if

Accepted Answer

A)   min{7,6} + 7/2p =0 6.
B)   7/(p + 1) + 3 =6.
C)   6/7 = p.
D)   6/(p + 1) =3.50 = 6.
E)   min{7,6}+6/2p= 6. B

Question 4

Mutt's utility function is U(m,j)=max{3m,j} and Jeff's utility function is U(m,j)= 3m + j.Mutt is initially endowed with 6 units of milk and 2 units of juice and Jeff is initially endowed with 2 units of milk and 6 units of juice.If we draw an Edgeworth box with milk on the horizontal axis and juice on the vertical axis and if we measure goods for Mutt by the distance from the lower left corner of the box,then the set of Pareto optimal allocations includes the

Accepted Answer

A)   bottom edge of the Edgeworth box but no other edges.
B)   left edge of the Edgeworth box but no other edges.
C)   right edge of the Edgeworth box but no other edges.
D)   left edge and bottom edge of the Edgeworth box.
E)   right edge and top edge of the Edgeworth box.

Question 5

Xavier and Yvette are the only two persons on a desert island.There are only two goods,nuts and berries.Xavier's utility function is U(Nx,Bx)=NxBx.Yvette's utility function is U(Ny,By)+5Ny =By.Xavier is endowed with 4 units of berries and 13 units of nuts.Yvette is endowed with 6 units of berries and 8 units of nuts.In a competitive equilibrium for this economy,how many units of berries does Xavier consume?

Accepted Answer

A)   37.50
B)   69
C)   34.50
D)   32.50
E)   None of the above.

Question 6

In a pure exchange economy,Ollie's utility function is U(x,y)= 3x +y and Fawn's utility function is U(x,y)=xy.Ollie's initial allocation is 1 x and no y's.Fawn's initial allocation is no x's and 2 y's.Draw an Edgeworth box for Fawn and Ollie.Put x on the horizontal axis and y on the vertical axis.Measure goods for Ollie from the lower left and goods for Fawn from the upper right.Mark the initial allocation with the letter W.The locus of Pareto optimal points consists of two line segments.Describe these line segments in words or formulas and show them on your graph.

Accepted Answer

The answer of In a pure exchange economy,Ollie's utility function...

Question 7

Morris has the utility function U(b,w)= 4b+16w and Philip has the utility function U(b,w)F= bw,where b is the number of books consumed per month and w is bottles of wine consumed per month.If we draw an Edgeworth box with books on the horizontal axis and wine on the vertical axis and if we measure Morris's consumptions from the lower left corner of the box,then the contract curve contains

Accepted Answer

A)   a straight line with slope 1/4 passing through the lower left corner of the box.
B)   a straight line running from the upper right corner of the box to the lower left.
C)   a straight line with slope 1/4 passing through the upper right corner of the box.
D)   a curve that gets steeper as you move from left to right.
E)   a curve that gets flatter as you move from left to right.

Question 8

Dan and Marilyn consume two goods,x and y.They have identical Cobb-Douglas utility functions.Initially Dan owns 10 units of x and 10 units of y.Initially Marilyn owns 40 units of x and 20 units of y.They make exchanges to reach a Pareto optimal allocation which is better for both than the no-trade allocation.Which of the following is not necessarily true about the allocation they trade to?

Accepted Answer

A)   Marilyn consumes 5 units of x for every 3 units of y that she consumes.
B)   The locus of Pareto optimal allocations is a diagonal straight line in the Edgeworth box.
C)   Dan's consumption of x is greater than his consumption of y.
D)   Dan consumes more than 10 units of x.
E)   Marilyn consumes at least 40 units of x.

Question 9

In a two-person,two-good,exchange economy,both consumers have quasilinear utility functions,linear in good 2.If quantities of good 1 are measured horizontally and quantities of good 2 are measured vertically in the Edgeworth box,the set of Pareto optimal allocations includes

Accepted Answer

A)   a horizontal line through the interior of the box.
B)   a vertical line.
C)   a straight line from the lower left to the upper right corner of the box.
D)   a curved line from the lower left to the upper right corner of the box.
E)   all four edges of the box.

Question 10

According to the first theorem of welfare economics:

Accepted Answer

A)   every competitive equilibrium is fair.
B)   if the economy is in a competitive equilibrium,there is no way to make anyone better off.
C)   a competitive equilibrium always exists.
D)   at a Pareto optimum,all consumers must be equally wealthy.
E)   None of the above.

Question 11

Tamara and Julio consume only bread and wine.They trade only with each other and there is no production.They both have strictly convex preferences.Tamara's initial endowment of bread and wine is the same as Julio's.

Accepted Answer

A)   At the initial endowment their marginal rates of substitution must be the same.
B)   In a competitive equilibrium,the ratio of the two prices must be 1.
C)   In a competitive equilibrium,they must consume identical consumption bundles.
D)   If they have identical utility functions,then the initial allocation is Pareto optimal.
E)   None of the above.

Question 12

If the initial endowment is on the contract curve,then there must always be a competitive equilibrium in which no trade takes place.

Accepted Answer

A) True 
 B)False

Question 13

A small economy has only two consumers,Nick and Minnie.Nick's utility function is U(x,y)= x +154y1/2.Minnie's utility function is U(x,y)= x +7y.At a Pareto optimal allocation in which both individuals consume some of each good,how much y does Nick consume?

Accepted Answer

A)   22
B)   18
C)   121
D)   9
E)   We can't tell without knowing the initial endowments.

Question 14

Kens utility function is U(Q K,W K)= Q K W K and Barbies utility function is U(Q B,W B)= Q B W B.If Kens initial endowment were 5 units of quiche and 9 units of wine and Barbies endowment were 10 units of quiche and 9 units of wine,then at any Pareto optimal allocation where both persons consumed some of each good,

Accepted Answer

A)   Ken would consume 15 units of quiche for every 18 units of wine that he consumed.
B)   Barbie would consume twice as much quiche as Ken.
C)   Ken would consume 5 units of quiche for every 9 units of wine that he consumed.
D)   Barbie would consume 10 units of quiche for every 9 units of wine that she consumed.
E)   None of the above.

Question 15

If two people have identical homothetic preferences and if their indifference curves have a diminishing marginal rate of substitution,then in an Edgeworth box,the locus of Pareto optimal allocations between them is a diagonal straight line.

Accepted Answer

A) True 
 B)False

Question 16

A situation is Pareto efficient if

Accepted Answer

A)   there is no way to make everyone worse off without making someone better off.
B)   aggregate profits are maximized.
C)   there is no way to make someone better off without making someone else worse off.
D)   there is some way to make everyone better off.
E)   there is no way to make anyone better off.

Question 17

If an allocation is Pareto optimal and if indifference curves between the two goods have no kinks,then

Accepted Answer

A)   two consumers who consume both goods must have the same MRS between them,but consumers may consume the goods in different ratios.
B)   two consumers with the same income who consume both goods must have the same MRS,but if their incomes differ,their MRSs may differ.
C)   any two consumers who consume both goods must consume them in the same ratio.
D)   for any two consumers who consume both goods,neither will prefer the other consumer's bundle to his own.
E)   all consumers receive the bundle that they prefer to any other bundle the economy could produce for them.

Question 18

Morris has the utility function U(b,w)=3b + 3w and Philip has the utility function U(b,w)= bw,where b is the number of books consumed per month and w is bottles of wine consumed per month.If we draw an Edgeworth box with books on the horizontal axis and wine on the vertical axis and if we measure Morris's consumptions from the lower left corner of the box,then the contract curve contains

Accepted Answer

A)   a straight line running from the upper right corner of the box to the lower left.
B)   a curve that gets steeper as you move from left to right.
C)   a straight line with slope 1/1 passing through the lower left corner of the box.
D)   a straight line with slope 1/1 passing through the upper right corner of the box.
E)   a curve that gets flatter as you move from left to right.

Question 19

Xavier and Yvette are the only two persons on a desert island.There are only two goods,nuts and berries.Xavier's utility function is U(Nx,Bx)=NxBx.Yvette's utility function is U(Ny,By)=2Ny + By.Xavier is endowed with 3 units of berries and 8 units of nuts.Yvette is endowed with 6 units of berries and 8 units of nuts.In a competitive equilibrium for this economy,how many units of berries does Xavier consume?

Accepted Answer

A)   12.50
B)   19
C)   7.50
D)   9.50
E)   None of the above.

Question 20

In a pure exchange economy with two persons and two goods,one person always prefers more to less of both goods and one person likes one of the goods and hates the other so much that she would have to be paid to consume it.Both are initially endowed with positive amounts of both goods.The competitive equilibrium price of the good that one person hates

Accepted Answer

A)   must be negative.
B)   must be smaller than the price of the good both people like.
C)   must be less than 1.
D)   could be positive or negative,depending on details of tastes and technology.
E)   must be positive.

Exam 32:Exchange-Part A

In a two-person,two-good,exchange economy,both consumers have quasilinear utility functions,linear in good 2.If quantities of good 1 are measured horizontally and quantities of good 2 are measured vertically in the Edgeworth box,the set of Pareto optimal allocations includes

According to the first theorem of welfare economics:

Tamara and Julio consume only bread and wine.They trade only with each other and there is no production.They both have strictly convex preferences.Tamara's initial endowment of bread and wine is the same as Julio's.

If the initial endowment is on the contract curve,then there must always be a competitive equilibrium in which no trade takes place.

A small economy has only two consumers,Nick and Minnie.Nick's utility function is U(x,y) = x +154y^1/2.Minnie's utility function is U(x,y) = x +7y.At a Pareto optimal allocation in which both individuals consume some of each good,how much y does Nick consume?

If two people have identical homothetic preferences and if their indifference curves have a diminishing marginal rate of substitution,then in an Edgeworth box,the locus of Pareto optimal allocations between them is a diagonal straight line.

A situation is Pareto efficient if

If an allocation is Pareto optimal and if indifference curves between the two goods have no kinks,then

Exam 32:Exchange-Part A

In a two-person,two-good,exchange economy,both consumers have quasilinear utility functions,linear in good 2.If quantities of good 1 are measured horizontally and quantities of good 2 are measured vertically in the Edgeworth box,the set of Pareto optimal allocations includes

According to the first theorem of welfare economics:

Tamara and Julio consume only bread and wine.They trade only with each other and there is no production.They both have strictly convex preferences.Tamara's initial endowment of bread and wine is the same as Julio's.

If the initial endowment is on the contract curve,then there must always be a competitive equilibrium in which no trade takes place.

A small economy has only two consumers,Nick and Minnie.Nick's utility function is U(x,y) = x +154y1/2.Minnie's utility function is U(x,y) = x +7y.At a Pareto optimal allocation in which both individuals consume some of each good,how much y does Nick consume?

If two people have identical homothetic preferences and if their indifference curves have a diminishing marginal rate of substitution,then in an Edgeworth box,the locus of Pareto optimal allocations between them is a diagonal straight line.

A situation is Pareto efficient if

If an allocation is Pareto optimal and if indifference curves between the two goods have no kinks,then

A small economy has only two consumers,Nick and Minnie.Nick's utility function is U(x,y) = x +154y^1/2.Minnie's utility function is U(x,y) = x +7y.At a Pareto optimal allocation in which both individuals consume some of each good,how much y does Nick consume?