Applications of 2nd Welfare Theorem

Question 1

When z increases, production curve _________

Answer 1

becomes steeper

Question 2

When z increases, Y vs l graph _____

Answer 2

becomes steeper

Question 3

When z increases, c* ________

Answer 3

increases

c always moves with z

Question 4

When z increases, l* ________

Answer 4

is ambiguous

Depends on which among substitution and income effect is dominant

Question 5

When z increases, substitution effect causes c to ______ and l to ______

Answer 5

increase; decrease

c always moves with z
sub = c and l move opposite

Question 6

When z increases, income effect causes c to ______ and l to ______

Answer 6

increase; increase

c always moves with z
income = c and l move together

Question 7

z increases.

If substitution effect = income effect, c* will _____ and l* will _____

Answer 7

increase; be unchanged

c always moves with z

Question 8

z increases.

If substitution effect > income effect, c* will _____ and l* will _____

Answer 8

increase; decrease

c always moves with z
sub = c and l move opposite

Question 9

z increases.

If substitution effect < income effect, c* will _____ and l* will _____

Answer 9

increase; increase

c always moves with z
income = c and l move together

Question 10

When z decreases, production curve _________

Answer 10

becomes flatter

Question 11

When z decreases, Y vs l graph _____

Answer 11

becomes flatter

Question 12

When z decreases, c* ________

Answer 12

decreases

c always moves with z

Question 13

When z decreases, l* ________

Answer 13

is ambiguous

Question 14

When z decreases, substitution effect causes c to ______ and l to ______

Answer 14

decrease; increase

c always moves with z
sub = c and l move opposite

Question 15

When z decreases, income effect causes c to ______ and l to ______

Answer 15

decrease; decrease

c always moves with z
income = c and l move together

Question 16

z decreases.

If substitution effect = income effect, c* will _____ and l* will _____

Answer 16

decrease; be unchanged

Question 17

z decreases.

If substitution effect > income effect, c* will _____ and l* will _____

Answer 17

decrease; increase

c always moves with z
sub = c and l move opposite

Question 18

z decreases.

If substitution effect < income effect, c* will _____ and l* will _____

Answer 18

decrease; decrease

c always moves with z
income = c and l move together

Question 19

When z increases, Y* _______

Answer 19

increases

because Y = c + G and c* increases

Question 20

When z decreases, Y* _______

Answer 20

decreases

because Y = c + G and c* decreases

Question 21

When G increases, PPF _____

Answer 21

shifts down

Question 22

When G increases, c* _____, l* ______ and N* ______

Answer 22

decreases; decreases; increases

Question 23

When G increases, Y _______

Answer 23

increases

because Y = zF(K bar, N) and N* increases

Question 24

When z changes, Y changes as per _____

Answer 24

c*

Question 25

When G decreases, PPF _____

Answer 25

shifts up

Question 26

When G decreases, c* _____, l* ______ and N* ______

Answer 26

increases; increases; decreases

Question 27

When G decreases, Y _______

Answer 27

decreases

because Y = zF(K bar, N) and N* decreases

Question 28

When G changes, Y changes as per _____

Answer 28

N*

Question 29

When productivity of leisure increases, __________ for leisure increases

Answer 29

preference

Question 30

When productivity of leisure increases, max ______

Answer 30

u(c, theta*l)

Question 31

When productivity of leisure increases, u_l _________ and leisure __________

Answer 31

decreases; increases

because theta* u_l / u_c = w and with everything else constant, increasing theta must decrease u_l. Since u_ll < 0, decreasing u_l must increase l