Question 1

Which of the following best describes a Pareto efficient allocation?

Accepted Answer

An allocation where it is impossible to make any individual better off without making at least one individual worse off.

Question 2

Suppose Jane and Denise are isolated with 50 piles of firewood and 80 bars of candy. Jane’s endowment is 30 piles of firewood and 20 candy bars, while Denise’s is 20 piles of firewood and 60 candy bars. If their indifference curves are tangent at a particular allocation, what does this imply?

Accepted Answer

They have reached a Pareto efficient allocation and no further mutually beneficial trades are possible.

Question 3

In the context of general equilibrium, what is the main difference between partial-equilibrium and general-equilibrium analysis?

Accepted Answer

Partial-equilibrium examines one market in isolation, while general-equilibrium considers all markets simultaneously.

Question 4

If the marginal rate of substitution (MRS) between candy and firewood for Jane is $$2$$ and for Denise is $$3 at a $$given allocation, what does this indicate?

Accepted Answer

The allocation is not Pareto efficient, and mutually beneficial trades are still possible.

Question 5

Suppose the government imposes a tax $$t$$ per hour on labor in only the covered sector of the economy. What is the likely effect on employment in the covered and uncovered sectors?

Accepted Answer

Employment in the covered sector decreases, while employment in the uncovered sector increases.

Question 6

Jane can produce either $$3$$ candy bars or $$6$$ piles of firewood per day. Denise can produce $$6$$ candy bars or $$3$$ piles of firewood per day. Who has the comparative advantage in producing candy?

Accepted Answer

Denise, because her opportunity cost of producing candy is lower than Jane’s.

Question 7

Which of the following statements is implied by the First Theorem of Welfare Economics?

Accepted Answer

Any competitive equilibrium is Pareto efficient.

Question 8

Suppose the production possibility frontier (PPF) for an economy is concave. What does this imply about the marginal rate of transformation (MRT) as more of one good is produced?

Accepted Answer

The MRT increases in absolute value as more of one good is produced.

Question 9

Which of the following is a key implication of Arrow’s Impossibility Theorem?

Accepted Answer

No social decision-making rule can always satisfy all reasonable criteria for aggregating individual preferences.

Question 10

If a competitive equilibrium achieves an efficient product mix, what does this mean in terms of marginal rates?

Accepted Answer

The marginal rate of transformation (MRT) equals the marginal rate of substitution (MRS) for all consumers.

Question 11

Suppose a minimum wage is imposed only in the manufacturing sector, but not in agriculture. What is a likely outcome?

Accepted Answer

Workers will move from manufacturing to agriculture, increasing labor supply in the uncovered sector.

Question 12

Which of the following best describes the contract curve in an Edgeworth box?

Accepted Answer

The set of all Pareto-efficient allocations where the parties’ indifference curves are tangent.

Question 13

A utilitarian social welfare function is given by $$W = \sum_{i=1}^n U_i. $$What does this imply about society’s preferences?

Accepted Answer

Society aims to maximize the sum of individual utilities.

Question 14

If the government wants to achieve a particular Pareto-efficient allocation using competitive markets, what must be true according to the Second Theorem of Welfare Economics?

Accepted Answer

The government must set the initial endowment appropriately.

Question 15

Suppose the marginal cost of producing candy is $$MC_c$$ and the marginal cost of producing wood is $$MC_w. At $$the optimal product mix, what is true about the price ratio $$\frac{P_c}{P_w}$$?

Accepted Answer

$$\frac{P_c}{P_w} = \frac{MC_c}{MC_w}$$

Question 16

Which of the following is a possible outcome when society uses a Rawlsian social welfare function?

Accepted Answer

Society prefers allocations that maximize the utility of the worst-off individual.

Question 17

If a freeze reduces the supply of coffee but not tea, and the demand for both goods depends on both prices, what is the likely effect on the equilibrium prices?

Accepted Answer

The price of coffee will rise, and the price of tea may also rise due to substitution in demand.

Question 18

Which of the following statements about efficiency and equity is correct?

Accepted Answer

A competitive equilibrium may be efficient but not equitable.

Question 19

Suppose society must choose between two allocations, $$x$$ and $$y. $$Allocation $$x$$ makes some people better off and no one worse off compared to $$y. $$According to the Pareto criterion, which allocation is preferred?

Accepted Answer

Allocation $$x is $$Pareto superior to $$y$$ and is preferred.

General Equilibrium and Economic Welfare: Study Notes

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