Deck 16: General Equilibrium and Economic Efficiency

Question 1

Gasoline and bicycles are substitutes in consumption. Suppose we increase the federal gasoline tax to $1 per gallon. Initially, the gasoline price rises due to the tax, and the demand curve for bicycles shifts rightward because these goods are substitutes. What are the secondary changes that result from the gasoline tax as these markets adjust to a new general equilibrium?

A) Bicycle price rises, demand for gasoline shift s leftward.
B) Bicycle price rises, demand for gasoline shifts rightward.
C) Bicycle price declines, demand for gasoline shifts leftward.
D) Bicycle price declines, demand for gasoline shifts rightward.

Answer 1

B

Question 2

Which of the following is true? Partial equilibrium analysis will

A) overstate the impact of a tax for both substitutes and complements.
B) understate the impact of a tax for both substitutes and complements.
C) understate the impact of a tax for complements and overstate the impact for substitutes.
D) understate the impact of a tax for substitutes and overstate the impact for complements.

Answer 2

D

Question 3

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?

A) Gasoline price rises, demand for bicycles shift s leftward.
B) Gasoline price rises, demand for bicycles shifts rightward.
C) Gasoline price rises, move downward along bicycle demand curve.
D) Gasoline price rises, move upward along bicycle demand curve.

Answer 3

B

Question 4

The curve in the diagram below is called:

A) the contract curve.
B) the utility possibilities frontier.
C) the production possibilities frontier.
D) the production contract curve.

Question 5

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. Suppose instead that Sam is initially allocated 3 cheese doodles and 3 pretzels, whereas Sally is initially allocated 6 cheese doodles and 10 pretzels. Which of the following statements is TRUE?

A) This allocation is Pareto optimal.
B) This allocation is not Pareto optimal as Sally and Sam have unequal amounts of each good.
C) The allocation is not Pareto optimal as Sally would be willing to exchange two pretzels for one cheese doodle and be better off, without making Sam worse off.
D) The allocation is not Pareto optimal as Sam would willing exchange one pretzel for two cheese doodles and be better off, without making Sally worse off.

Question 6

Coffee and donuts are complements in consumption. Suppose the economy expands so that consumer income increases, and coffee is a normal good. What impact does this change in the coffee market have on the donut market under a general equilibrium analysis?

A) Donut demand shifts rightward and donut price and quantity increase
B) Donut demand shifts rightward, donut price increases, and donut quantity declines
C) Donut demand shifts leftward, donut price declines, and donut quantity increases
D) Donut demand shifts leftward and donut price and quantity decline

Question 7

Which of the following is true at the exchange equilibrium between two individuals?

A) Their marginal rates of substitution are equal.
B) The slopes of the individuals' indifference curves are equal.
C) Both individuals' marginal rates of substitution are equal to the ratio of the prices of the goods.
D) A and B only
E) A, B, and C are all true.

Question 8

The Edgeworth box illustrates possibilities for Karen and James to increase their satisfaction by trading goods. If point A gives the initial allocation of food and clothing, a movement into the shaded area:

A) leaves Karen better off, but James worse off.
B) leaves James better off, but Karen worse off.
C) leaves James and Karen worse off.
D) leaves James and Karen better off.

Question 9

Gasoline and bicycles are substitutes in consumption. Suppose we increase the federal gasoline tax to $1 per gallon. Initially, the gasoline price rises due to the tax, and the demand curve for bicycles shifts rightward because these goods are substitutes. Then, the bicycle price rises, and the demand curve for gasoline shifts rightward. Assuming the general equilibrium is achieved in both markets after these two steps, which of the following statements is NOT true?

A) Partial equilibrium analysis only focuses in the first-round changes in the gasoline market (ignoring the secondary effects that arise from changes in the bicycle market).
B) Partial equilibrium analysis would predict a larger shift in the price and quantity demanded for gasoline than a general equilibrium analysis.
C) The price increase in gasoline is larger under the general equilibrium approach, but the change in the quantity of gasoline demanded is smaller than under partial equilibrium analysis.
D) All of these statements are true.

Question 10

The markets for movie theater tickets and videocassette rentals are highly interdependent. Suppose that a tax is imposed on movie theater tickets. The type of analysis that examines the effects of this tax on the markets for movie theater tickets and videocassettes simultaneously is called

A) macroeconomics.
B) general equilibrium analysis.
C) partial equilibrium analysis.
D) full market analysis.
E) psychoanalysis.

Question 11

General equilibrium analysis is different from partial equilibrium analysis in that general equilibrium analysis

A) explicitly takes feedback effects into account and partial equilibrium analysis does not.
B) does not take into consideration specific problems, but partial equilibrium analysis does.
C) takes into consideration specific problems, but partial equilibrium analysis does not.
D) allows one to arrive at a specific conclusion, but partial equilibrium analysis does not.

Question 12

An allocation in which one person can be made better off only by making someone else worse off is

A) inefficient.
B) efficient.
C) a partial equilibrium.
D) a general equilibrium.

Question 13

Coffee and donuts are complements in consumption. Suppose bad weather in the coffee producing regions of the world, which shifts the coffee supply curve leftward. How do the general equilibrium price and quantity outcomes compare to the partial equilibrium outcomes for this situation?

A) General equilibrium price and quantity are higher
B) General equilibrium price is higher and quantity is lower
C) General equilibrium price is lower and quantity is higher
D) General equilibrium price and quantity are lower

Question 14

An efficient allocation of goods in an exchange economy means that

A) goods were produced by the most efficient technology available.
B) no one can be made better off without making somebody else worse off.
C) those made worse off are not hurt as badly as the benefits resulting from those made better off. That is, there is a net positive gain.
D) in a particular production process one gets the maximum output for a given input.

Question 15

In a problem involving exchange, the contract curve shows

A) all exchanges that make both parties better off.
B) the one exchange that makes both parties better off.
C) all possible allocations of goods between both parties.
D) all possible efficient allocations between both parties.

Question 16

The contract curve in an Edgeworth Box diagram illustrates

A) the only efficient allocation of goods among individuals.
B) all possible efficient allocations of goods among individuals.
C) all equitable distributions of goods among individuals.
D) the only equitable distribution of goods among individuals.

Question 17

The industry analysts have long recognized that there is a high degree of complementarity between automobile tires and gasoline. A recent study done by an automobile industry trade group estimated the following supply and demand functions:
Q_D^T = 5,250,000 - 12,500P^T - 750,000P^G
Q_S^T = -350,000 + 11,750P^T
Q_D^G = 80,500,000 - 30,000,000P^G - 2,500P^T
Q_S^G = 35,000,000 + 15,000,000P^G,
where O_D^T and Q_S^T refer to quantities of tires demand and supplied each month measured in sets of four, Q_D^G and Q_S^G refer to quantities of gasoline demanded and supplied each month measured in gallons, P^G is the price of gasoline per gallon, and P^T is the price per set of four tires.
a. Calculate the equilibrium price and quantity that will prevail in both the tire and gasoline markets. (Hint: Recall that Q_D must equal Q_S in each market.)
b. Assume that a recession causes the demand curve for gasoline to shift leftward as follows:
Q_D^G = 76,000,000 - 30,000,000P^G - 2,500P^T
Calculate the initial impact of this change in demand on the gasoline and tire markets. (You need calculate only one change in P and Q for each market.)
c. Discuss the changes that will occur after the initial round to move each market back to a stable equilibrium. Your answer to part (c) requires no calculations, but graphs would help convey your understanding of the process.

Question 18

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?

A) The initial allocation is Pareto optimal as it is equitable.
B) The initial allocation is Pareto optimal as Sally and Sam have equal amounts of both goods.
C) The allocation is not Pareto optimal. An allocation that gave Sam all of the cheese doodles and Sally all of the pretzels would make both of them better off.
D) The allocation is not Pareto optimal. An allocation that gave Sam four of the cheese doodles and sixteen of the pretzels (leaving Sally the rest) would make both of them better off.

Question 19

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

A) closed economy macroeconomics.
B) international economics.
C) partial equilibrium analysis.
D) full market analysis.
E) general equilibrium analysis.

Question 20

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

A) A discussion of factors within the wheat market that influence wheat prices
B) An analysis of the effects of changes in oil prices upon the natural gas market
C) An evaluation of relationships between the markets for tires and automobiles
D) none of the above

Question 21

Imagine a primitive society in which there are two goods: food and shelter. The utility functions for two representative members of the society, Jane and Paul, are given below.
Jane's utility function:
U^J = 25F^0.5S^0.5
Paul's utility function:
U^P = 50F^0.75S^0.25
where F = units of food, and S = units of shelter.
a. Determine the marginal rate of substitution for each individual.
b. The current prices of food and shelter are $12 and $6, respectively. Determine the proportions in which Jane and Paul should consume food and clothing to achieve an exchange equilibrium.

Question 22

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.

Question 23

The statement: "If everyone trades in the competitive marketplace, all mutually beneficial trades will be completed, and the resulting equilibrium allocation of resources will be economically efficient." is formally known as:

A) the law of supply and demand.
B) the first theorem of supply and demand.
C) the first theorem of welfare economics.
D) the first theorem of efficiency in economics.

Question 24

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?

Question 25

Why does perfect competition guarantee a Pareto optimal distribution of goods between two people? Under perfect competition,

A) everyone has the same preferences.
B) everyone faces the same prices.
C) everyone consumes the same quantity of both goods.
D) goods are homogeneous.

Question 26

Suppose there are 10 apples and 10 oranges in the economy. Joe is currently consuming 4 apples and 5 oranges, and Jane is consuming 6 apples and 5 oranges. At this allocation, Joe's marginal utility of apples is 3, and his marginal utility of oranges is 5. Jane's marginal utility of apples is 6, and her marginal utility of oranges is 10. The current price of apples is $4 and the current price of oranges is $5. To reach a competitive equilibrium, the required price adjustment is:

A) a decrease in the apple price relative to the orange price.
B) a decrease in the orange price relative to the apple price.
C) no change in the relative prices.
D) an increase in both prices.

Question 27

Use the following statements to answer this question:
I) The first theorem of welfare economics refers to efficient allocation of goods across groups of consumers, and it does not consider the problem of efficient production of these goods.
II) The only way to achieve an efficient allocation of goods is to use competitive markets.

A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
D) I and II are true.

Question 28

All possible efficient allocations of 2 goods between 2 people are located on

A) the indifference curve.
B) the contract curve.
C) the production possibilities frontier.
D) the budget line.

Question 29

To be certain that exchange between people is mutually beneficial, we generally assume

A) not all people are free to enter the market at will, but once in they are free to make any offer to trade.
B) all people have complete information about each other's preferences.
C) there are no transaction costs.
D) both B and C
E) both A and B

Question 30

Two individuals, A and B, are free to engage in trade of clothing and food. Initially, A has 12 units of clothing and 9 units of food, and B has 8 units of clothing and 11 units of food. The individuals have the following utility functions in clothing C and food F:
U_A = 0.15Q_C ∙ Q_F
U_B = 0.08Q_C ∙ Q_F
where Q_F represents units of food, Q_C represents units of clothing, and U represents utility. Determine if a mutually beneficial trade is possible between A and B. If so, who would trade for what?

Question 31

Suppose there are 10 apples and 10 oranges in the economy. Joe is currently consuming 4 apples and 5 oranges, and Jane is consuming 6 apples and 5 oranges. At this allocation, Joe's marginal utility of apples is 3, and his marginal utility of oranges is 5. Jane's marginal utility of apples is 6, and her marginal utility of oranges is 10. If the current price of apples is $4 and the current price of oranges is $5, then there is an:

A) excess demand for apples and an excess supply of oranges.
B) an excess demand for oranges and an excess supply of apples.
C) equilibrium in the market with no excess supply or demand for either good.
D) an excess supply of apples and oranges.

Question 32

Suppose there is a water shortage, and the governor proposes that the government distribute equal quantities of water to each person at no cost to the consumers. If consumers were forbidden to trade water, would such a distribution be Pareto optimal?

A) Yes, because each person has the same amount of water as everyone else.
B) Yes, because everyone would be receive their water for free.
C) Not necessarily, as people may differ in their marginal rates of substitution between water and other goods.
D) It is impossible to determine without knowing the price of water.
E) none of the above

Question 33

Once a point on a contract curve has been chosen,

A) it is possible to make both individuals better off.
B) it is possible to make one individual better off only at the expense of the other.
C) there is no change that would make both individuals worse off.
D) it is impossible for both individuals to have more of both goods.

Question 34

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

A) It is possible to reallocate the goods between the two people so as to increase the utility of both people.
B) It is possible to reallocate the goods between the two people so as to increase the utility of one person without decreasing the utility of the other.
C) It is possible to reallocate the goods between the two people so as to increase the utility of one person, but only at the expense of the other person.
D) It is impossible to reallocate the goods between the two people so as to increase either person's utility.
E) none of the above

Question 35

If the initial distribution of labor and capital is Pareto optimal, which of the following statements is TRUE?

A) It is possible to reallocate labor and capital across industries so as to increase the production of one good without decreasing the production of another good.
B) It is possible to reallocate labor and capital across industries so as to increase the production of one good, but only by reducing the production of another good.
C) It is possible to reallocate labor and capital across industries so as to increase the production of every good.
D) none of the above

Question 36

In an Edgeworth box, all points of efficiency occur at the

A) intersections of the indifference curves.
B) the points of tangency between the sets of indifference curves.
C) in the midpoint of the diagram.
D) at any point other than the intersections of the indifference curves.

Question 37

Suppose there are 10 apples and 10 oranges in the economy. Joe is currently consuming 4 apples and 5 oranges, and Jane is consuming 6 apples and 5 oranges. At this allocation, Joe's marginal utility of apples is 3, and his marginal utility of oranges is 5. Jane's marginal utility of apples is 9. The current allocation is necessarily efficient if:

A) the price of apples is 60% of the orange price.
B) Jane's marginal utility of oranges is 6 at this point.
C) Joe's MRS equal the MRT.
D) Jane's marginal utility of oranges is 15 at this point.

Question 38

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

A) both individuals better off.
B) both individuals worse off.
C) one individual better off and the other individual worse off.
D) the goods more expensive.

Question 39

For an individual consumer, a corner solution may be optimal such that MRS and MRT are not equal,

A) but this is not possible in an Edgeworth Box due to the transitivity of preferences.
B) but this is not possible in an Edgeworth Box because price ratios must be positive.
C) and this may also occur in an Edgeworth Box.
D) and this may only occur in an Edgeworth Box under the perfect complements case.

Question 40

Consider a potential, voluntary exchange between two people. Assume that both people have complete information about each other's preferences and that there are no transaction costs. Consumers A and B have between them 9 units of X and 15 units of Y. Initially, A has 6 of X and 10 of Y, and B has 3 of X and 5 of Y. Consumer A's marginal rate of substitution of X for Y is 2 and B's marginal rate of substitution of X for Y is 1/3. Is there room for a mutually beneficial, voluntary exchange? Determine which consumer would trade for more X and which consumer would trade for more Y. If trade takes place, can you explain the terms of trade?

Question 41

A point lying beyond the utilities possibilities frontier is

A) unattainable.
B) efficient.
C) inefficient.
D) profitable.

Question 42

The egalitarian view of equity would lead to:

A) equal allocations of goods across all persons.
B) maximizing the utility of the least-well-off person.
C) maximizing the total utility of all society members.
D) none of the above

Question 43

A competitive equilibrium is efficient in the production and exchange of two goods X and Y when

A) MRS_XY = MRT_LK (where L = labor input and K = capital input).
B) MRT_XY = MRS_LK (where L = labor input and K = capital input).
C) MRS_XY = MRT_XY.
D) MC_X/MC_Y = P_Y/P_X.

Question 44

The curve in the diagram is called:

A) the contract curve.
B) the utility possibilities frontier.
C) the production possibilities frontier.
D) the production contract curve.

Question 45

From a point within the utilities possibilities frontier,

A) movement to another point within the frontier can only increase one person's utility, but not both people's utility.
B) it is possible to find another point within the frontier that generates higher utility for both people.
C) it is possible to find another point within the frontier that involves higher output of both goods.
D) any move to another point within the frontier will necessarily decrease someone's utility.

Question 46

When comparing point A, which lies within a utilities possibilities frontier, with point B, which lies on the same utilities possibilities frontier,

A) A is necessarily more efficient than B.
B) A is necessarily more equitable than B.
C) B is necessarily more efficient than A.
D) B is necessarily more equitable than A.

Question 47

The slope of the utility possibilities frontier is

A) positive.
B) negative.
C) zero.
D) undefined.

Question 48

All points within the utilities possibilities frontier are

A) unattainable.
B) efficient.
C) inefficient.
D) profitable.

Question 49

What does the negative slope of the utilities possibilities frontier imply?

A) Diminishing marginal utility.
B) The only way to increase one person's utility is to decrease another person's utility.
C) Diminishing marginal rates of substitution.
D) The only way to increase output of one good is to decrease output of another.

Question 50

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

A) Markets are perfectly competitive.
B) It is possible to move to from one point on the frontier to another point and make everyone better off.
C) All allocations are efficient.
D) It includes some unattainable points.

Question 51

Use the following statements to answer this question:
I) Following the properties of indifference curves, the utility possibilities frontier should be convex to (bowed into toward) the origin.
II) The slope of the utility possibilities frontier equals -1 times the slope of the contract curve.

A) I and II are true.
B) I is true and II is false.
C) II is true and I is false.
D) I and II are false.

Question 52

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.

Question 53

When comparing point A, which lies within a utilities possibilities frontier, with point B, which lies on the same utilities possibilities frontier,

A) A may be more efficient than B.
B) A is necessarily more equitable than B.
C) B may be more equitable than A.
D) B is necessarily more equitable than A.

Question 54

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

A) both equity and efficiency.
B) equity but not efficiency.
C) efficiency but not equity.
D) profitability but not efficiency.

Question 55

The main point of the second theorem of welfare economics is that:

A) efficiency is more important than equity.
B) efficiency may be achieved, but equity is not a feasible goal.
C) any attempt to achieve an equitable outcome must occur off the contract curve.
D) any equitable outcome can be achieved by reallocating the resources among the members of a society.

Question 56

The utilitarian view of equity would lead to:

A) equal allocations of goods across all persons.
B) maximizing the utility of the least-well-off person.
C) maximizing the total utility of all society members.
D) none of the above

Question 57

Assume there are only two individuals in an economy, Lisa and Bart. The utility possibilities frontier for these individuals is given as:
120 = U_L + U_B
Where U_L is Lisa's utility and U_B is Bart's utility. Lisa's current level of utility is 20, Bart's level of utility is 90. This combination is:

A) inefficient.
B) economically efficient.
C) impossible, because it is outside of the welfare frontier.
D) none of the above

Question 58

Which of these statements is generally accepted by economists? Perfect competition

A) provides both equity and efficiency.
B) provides equity but not necessarily efficiency.
C) provides efficiency but not necessarily equity.
D) generally satisfies neither efficiency nor equity.

Question 59

When comparing point A, which lies within a utilities possibilities frontier, with point B, which lies on the same utilities possibilities frontier,

A) both A and B are efficient.
B) both A and B are equitable.
C) both A and B may be equitable.
D) neither A nor B could be efficient.

Question 60

The Rawlsian view of equity would lead to:

A) equal allocations of goods across all persons.
B) maximizing the utility of the least-well-off person.
C) maximizing the total utility of all society members.
D) none of the above

Question 61

In an economy which produces two goods X and Y, using two inputs L and K, efficient input use occurs when

A) MRTS_LK^X = MRS_LK^Y
B) MRT_XY = MRS_XY
C) MRS_X/P_X = MRS_Y/P_Y
D) MRTS_LK^X = MRTS_LK^Y

Question 62

The condition that requires MRTS for each input pair to equal the ratio of their marginal costs is known as ________ efficiency, and the condition that requires MRS for each output pair to equal their output price ratio is known as ________ efficiency.

A) economic, market
B) micro, macro
C) cost, revenue
D) technical, output

Question 63

A point lying to the northeast of the production possibilities frontier is

A) unattainable.
B) efficient.
C) inefficient.
D) profitable.

Question 64

Use the following statements to answer this question.
I) There are potential gains from trade when the economies of two countries differ so that one country has an absolute advantage in producing one good, while the second country has an absolute advantage in producing another good.
II) A country has an absolute advantage in producing a good if its cost is lower than the cost in another country.

A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.

Question 65

All points within the production possibilities frontier are

A) unattainable.
B) efficient.
C) inefficient.
D) profitable.

Question 66

Consider a competitive market in which people consume at the point where their marginal rates of substitution between products X and Y are 3/5. In this same market, producers produce where their marginal rates of transformation between X and Y are also 3/5. However, producers are producing 7 of Y and 3 of X, and consumers wish to consume 5 of Y and 5 of X per unit of time. Explain how this situation can exist. Also determine if it represents an equilibrium or not. If not an equilibrium, what will tend to happen in the market?

Question 67

The following table summarizes the production relationships in Mexico and Guatemala to produce tomatoes and beer:Table 16.1
Hours of Labor Required to Produce

Refer to Table 16.1. Use the following statements to answer this question.
I) Mexico has an absolute advantage in the production of tomatoes and beer.
II) Mexico has a comparative advantage in the production of tomatoes.

A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.

Question 68

The following table summarizes the production relationships in Mexico and Guatemala to produce tomatoes and beer:Table 16.1
Hours of Labor Required to Produce

Refer to Table 16.1. Which of the following statements is TRUE?

A) Guatemala has an absolute advantage in producing tomatoes.
B) Guatemala has an absolute advantage in producing beer.
C) Guatemala has a comparative advantage in producing beer.
D) Guatemala has a comparative advantage in producing tomatoes.
E) all of the above

Question 69

Which of the following is a condition for efficiency in the output market?

A) MRT = MP_L/MP_K
B) The marginal rate of substitution is the same for all customers.
C) The marginal rate of technical substitution must be the same for all producers.
D) The marginal rate of transformation must equal the marginal rate of substitution.

Question 70

The following table summarizes the production relationships in Mexico and Guatemala to produce tomatoes and beer:Table 16.1
Hours of Labor Required to Produce

Refer to Table 16.1. Which of the following statements is correct?

A) There are potential gains from trade if: (1) Mexico specializes in the production of tomatoes, (2) Guatemala specializes in the production of beer, and (3) Mexico trades tomatoes to Guatemala for beer.
B) There are potential gains from trade if: (1) Mexico specializes in the production of beer, (2) Guatemala specializes in the production of tomatoes, and (3) Mexico trades beer to Guatemala for tomatoes.
C) There are no potential gains from trade because Mexico has an absolute advantage in the production of beer and tomatoes.
D) There are no potential gains from trade because Guatemala has an absolute advantage in the production of beer and tomatoes.

Question 71

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

A) transformation.
B) technical substitution.
C) substitution.
D) profit.

Question 72

Suppose an economy produces milk and honey, and milk is plotted along the horizontal axis of the production possibilities frontier. The MRT is 2.5 at the current point of production, and the price of honey is $5 per unit. What is the current price of milk if the market outcome is efficient?

A) $12.50 per unit
B) $10 per unit
C) $2 per unit
D) $1 per unit

Question 73

What does the negative slope of the production possibilities frontier imply?

A) Diminishing marginal utility.
B) The only way to increase one person's utility is to decrease the other's.
C) Diminishing marginal rates of technical substitution.
D) The only way to increase output of one good is to decrease output of another.

Question 74

From any point within the production possibilities frontier,

A) the only way to increase production of one good is to decrease production of the other.
B) it is possible to increase both people's utility.
C) it is possible to increase output of both goods.
D) any move will necessarily decrease production of some good.

Question 75

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

A) Both people are maximizing utility.
B) It is impossible to increase production of either good.
C) All allocations are efficient.
D) It includes some unattainable points.

Question 76

The slope of the production possibilities frontier is

A) positive.
B) negative.
C) zero.
D) undefined.

Question 77

Why is the production possibilities frontier concave to (bowed away from) the origin?

A) Consumers have declining marginal utility, so their relative satisfaction from consuming a good changes as they move from high levels to low levels of consumption.
B) The shape of the curve is due to the marginal costs of producing the two goods. At high levels of output for a particular good, the marginal cost is very high, and the firm can use the same inputs to produce a relatively large quantity of the other good.
C) For a production possibilities frontier, we no longer assume firms are price takers, and the input prices and output prices change as the firms alter their mix of outputs.
D) none of the above

Question 78

Suppose an economy produces milk and honey, and milk is plotted along the horizontal axis of the production possibilities frontier. If the production in the economy is centrally planned (and not market oriented) so that the MRS for the current production level is 3 but the MRT is 2, then there will be an excess ________ for milk and an excess ________ for honey.

A) demand, supply
B) demand, demand
C) supply, demand
D) supply, supply
E) The market is in equilibrium, and there are no imbalances in supply or demand.

Question 79

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:

A) the new point of production lies above the production possibilities frontier.
B) the new point of production lies on the production possibilities frontier.
C) the new point of production lies below the production possibilities frontier.
D) we cannot determine where the new point of production lies relative to the production possibilities frontier.

Question 80

The following table summarizes the production relationships in Mexico and Guatemala to produce tomatoes and beer:Table 16.1
Hours of Labor Required to Produce

Refer to Table 16.1. Use the following statements to answer this question.
I) Trade between Mexico and Guatemala will allow Mexico to consume a combination of tomatoes and beer outside of Mexico's production possibilities frontier.
II) Trade between Mexico and Guatemala will allow Guatemala to consume a combination of tomatoes and beer outside of Guatemala's production possibilities frontier.

A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.