Question 1

Which of the following best describes the difference between structural power and bargaining power in voluntary economic interactions?

Accepted Answer

Structural power is determined by the value of the next best alternative, while bargaining power is determined by the ability to set the terms of exchange or threaten costs.

Question 2

In the context of the ultimatum game, what happens to the Proposer’s bargaining power if there are two Responders instead of one?

Accepted Answer

The Proposer’s bargaining power increases because the power to refuse is weaker with two Responders.

Question 3

Suppose Angela’s reservation option improves so that if she rejects Bruno’s offer, she receives 40% of the pie from another source. What is the minimum share Bruno must offer Angela for her to accept?

Accepted Answer

$$40\% of $$the pie

Question 4

Which of the following is an example of a substantive judgement of fairness?

Accepted Answer

Judging the fairness of the allocation based on how unequal the allocations are.

Question 5

Angela’s indifference curves between grain and free time become flatter as she has more free time. What does this imply about her marginal rate of substitution (MRS)?

Accepted Answer

Her MRS decreases as she has more free time.

Question 6

In the model, what condition must be met for Angela to achieve her optimal outcome as an independent farmer?

Accepted Answer

$$MRS = MRT$$

Question 7

Why is the allocation under forced labour considered Pareto efficient, even though it is unfair to Angela?

Accepted Answer

Because any change would make at least one party worse off.

Question 8

If Bruno offers Angela a take-it-or-leave-it contract, what is the maximum economic rent Angela can receive?

Accepted Answer

Angela receives zero economic rent.

Question 9

Suppose a new law sets a minimum wage and maximum working hours for Angela. What is the likely effect on Bruno’s economic rent compared to the take-it-or-leave-it contract?

Accepted Answer

Bruno’s economic rent decreases.

Question 10

Which of the following statements about Pareto efficiency is correct?

Accepted Answer

A Pareto efficient allocation means no one can be made better off without making someone else worse off.

Question 11

If Angela and Bruno negotiate after pro-worker legislation, and move from allocation N to a point where $$MRS = MRT$$, what is the effect on the joint surplus?

Accepted Answer

The joint surplus increases.

Question 12

Which of the following best explains why Angela’s share of the output increases when her reservation option improves?

Accepted Answer

Her bargaining power increases, so Bruno must offer her more to keep her working for him.

Question 13

In the context of the model, what does the vertical distance between the feasible frontier and Angela’s reservation indifference curve represent?

Accepted Answer

The potential joint surplus (economic rent) from the interaction.

Question 14

If Angela’s reservation indifference curve shifts upward due to new legislation, what happens to her utility at the minimum wage contract?

Accepted Answer

Her utility increases.

Question 15

Which of the following is NOT a procedural judgement of fairness?

Accepted Answer

How unequal the allocations are.

Question 16

Suppose Angela’s marginal rate of substitution (MRS) between grain and free time is lower than the marginal rate of transformation (MRT). What does this imply?

Accepted Answer

Angela can gain more utility by working more and consuming more grain.

Question 17

Which scenario gives Angela the highest economic rent?

Accepted Answer

Negotiated contract after pro-worker legislation.

Question 18

If the feasible frontier is concave, what does this imply about the marginal product of Angela’s labour as she works more hours?

Accepted Answer

The marginal product of labour decreases as Angela works more hours.

Question 19

Which of the following best describes the effect of institutions and rules on economic outcomes in the model?

Accepted Answer

Institutions and rules determine the feasible set and the distribution of power, affecting both efficiency and fairness.

Efficiency, Fairness, and Power in Economic Allocations: Microeconomics Study Guide

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