Question 1

Which of the following best describes a Pareto-efficient allocation in the context of general equilibrium?

Accepted Answer

An allocation where it is impossible to make any individual better off without making someone else worse off.

Question 2

In the Edgeworth Box model with two consumers and two goods, what does the contract curve represent?

Accepted Answer

The set of all Pareto-efficient allocations where the indifference curves of both consumers are tangent.

Question 3

Which condition is necessary for a market equilibrium to be considered efficient?

Accepted Answer

Production and consumption must both be efficient.

Question 4

Suppose a country discovers a large oil deposit, raising citizens’ income. According to general equilibrium theory, what is the likely effect?

Accepted Answer

Spillover effects will cause changes in prices and quantities in all markets simultaneously.

Question 5

Which of the following is NOT an assumption required for the First Theorem of Welfare Economics to hold?

Accepted Answer

Presence of externalities.

Question 6

If the marginal rate of substitution (MRS) for Jane equals the MRS for Denise at a point in the Edgeworth Box, what does this imply?

Accepted Answer

The allocation is Pareto-efficient.

Question 7

According to Walras’s Law, what must be true in a two-good, two-consumer general equilibrium model?

Accepted Answer

The value of aggregate excess demand across all goods is always zero for any set of prices.

Question 8

Which statement best summarizes the Second Theorem of Welfare Economics?

Accepted Answer

Any efficient allocation can be achieved by competition, given appropriate initial endowments.

Question 9

A government wants to redistribute wealth for equity without distorting allocative efficiency. According to theory, what is the best approach?

Accepted Answer

Use lump-sum transfers rather than taxes on transactions or production.

Question 10

Which of the following is an implication of the Theory of Second Best?

Accepted Answer

Eliminating one distortion in a market with multiple distortions may not improve welfare.

Question 11

Suppose society uses a Rawlsian social welfare function. What allocation will it choose?

Accepted Answer

The allocation that maximizes the utility of the worst-off individual.

Question 12

If a policy change increases consumer surplus by $$100 and decreases producer surplus by 80$$, what does the Kaldor-Hicks criterion suggest?

Accepted Answer

The change is a potential Pareto improvement, since total welfare increases.

Question 13

Which formula represents a utilitarian social welfare function for $$n$$ individuals?

Accepted Answer

$$W = U_1$ + U_2$ + ... + U_n$$

Question 14

In a general equilibrium model, what does the equation $$x_A(p_1$, p_2$) + x_B(p_1$, p_2$) = \$$omega_1$$^A + \$$omega_1$$^B$$ represent?

Accepted Answer

Market clearing for good 1: total demand equals total supply.

Question 15

Which of the following is a consequence of using marginal productivity as the basis for income distribution in a competitive equilibrium?

Accepted Answer

It tends to generate high inequality, rewarding those with valued talents or resources.

Question 16

If society’s social welfare function is $$W = a_1$ U_1$ + a_2$ U_2$ + ... + a_n U_n$$, what do the weights $$a_i$$ represent?

Accepted Answer

The relative importance of each individual's utility to overall social welfare.

Question 17

Which of the following best describes the difference between efficiency and equity in market outcomes?

Accepted Answer

Efficiency concerns maximizing the size of the economic 'pie', while equity concerns how the pie is divided.

Question 18

Suppose a government imposes an income tax to redistribute wealth. What is a potential trade-off according to microeconomic theory?

Accepted Answer

Redistribution may reduce efficiency by discouraging work effort.

Question 19

In the context of social welfare, why must any socially optimal allocation also be Pareto optimal?

Accepted Answer

If not, someone’s utility could be increased without reducing anyone else’s utility, indicating inefficiency.

Question 20

According to Rawls’ 'veil of ignorance' thought experiment, what kind of society would most people choose?

Accepted Answer

A society with equal rights and a minimum standard of living for all.

General Equilibrium and Social Welfare in Microeconomics

Study Guide - Practice Questions