ch 10

Question 1

General equilibrium analysis is the study of
A) how an equilibrium is determined in all markets simultaneously.
B) how an equilibrium is determined in all closely related markets.
C) the effects of a change in a market, and all spillover effects in all related markets.
D) Any of the above.

Answer 1

D) Any of the above.

Question 2

As opposed to general equilibrium analysis, partial equilibrium analysis looks
A) at an equilibrium and changes to it in a single, isolated market.
B) at how changes in all other markets effect a particular market.
C) at how equilibrium is determined in all markets simultaneously.
D) at either price or quantity movements.

Answer 2

A) at an equilibrium and changes to it in a single, isolated market

Question 3

If two or more markets are closely related,
A) a partial equilibrium analysis will tend to overstate the price impact of a supply shock.
B) a partial equilibrium analysis will tend to accurately predict the price impact of a supply shock.
C) a partial equilibrium analysis will tend to understate the price impact of a supply shock.
D) they should be analyzed concurrently but using partial equilibrium analysis alone.

Answer 3

C) a partial equilibrium analysis will tend to understate the price impact of a supply shock.

Question 4

There are two closely related crops, X and Y, with the following demand functions QX = 180 - 2PX + PY and QY = 150 + PX - PY where QX is the quantity of X, PX is the price of X, QY is the quantity of Y, and PY is the price of Y. These two crops are grown in two widely separated countries so there is no interrelationship between the supply curves. The short-run perfectly inelastic supply for X is 200 while the short-run perfectly inelastic supply for Y is 100. In equilibrium, the prices are
A) PX = 30, PY = 80.
B) PX = 40, PY = 60.
C) PX = 60, PY = 120.
D) PX = 80, PY = 130

Answer 4

A) PX = 30, PY = 80.

Question 5

Joe and Rita each have some cookies and milk. Joe is willing to trade 2 cookies for an additional ounce of milk. Rita is willing to trade 4 cookies for an additional ounce of milk. If trading is possible, which of the following is most likely to occur?

Answer 5

A) Joe will give some milk to Rita in exchange for cookies.

Question 6

Gains from trade can only occur when
A) marginal rates of substitutions differ across people.
B) marginal rates of substitution are equal across people.
C) indifference curves are convex.
D) people find themselves on the contract curve.

Answer 6

A) marginal rates of substitutions differ across people.

Question 7

Gains from trade will be possible as long as
A) people have different endowments.
B) people place different values on some goods.
C) marginal rates of substitution are equal across individuals.
D) excess supply equals excess demand.

Answer 7

B) people place different values on some goods.

Question 8

Which of the following is (are) the typical assumption(s) used in the study of mutually beneficial trades?
A) Each agent maximizes her utility.
B) Agents have convex-shaped indifference curves.
C) An agent’s utility is not interdependent of the other agents’ utilities.
D) All of the above.

Answer 8

D) All of the above.

Question 9

In a two-agent two-good economy, a Pareto-efficient allocation implies that
A) no further mutually beneficial trades are possible.
B) agents’ indifference curves intersect each other.
C) agents’ marginal rates of substitution are different.
D) agents’ marginal rates of transformation are different.

Answer 9

A) no further mutually beneficial trades are possible.

Question 10

For every allocation off the contract curve,
A) the contract curve has allocations that benefit at least one agent.
B) the contract curve has allocations that benefit always all agents.
C) the contract curve may not have any allocations that benefit at least one agent.
D) None of the above.

Answer 10

A) the contract curve has allocations that benefit at least one agent.

Question 11

The First Theorem of Welfare Economics can be expressed as
A) the competitive equilibrium results only when no transactions costs exist.
B) the competitive equilibrium does not involve reallocation of endowments.
C) any efficient allocations can be achieved by competition.
D) the competitive equilibrium is efficient.

Answer 11

D) the competitive equilibrium is efficient.

Question 12

An initial allocation of goods is called a(n)
A) endowment.
B) inheritance.
C) pareto set.
D) general equilibrium goods set.

Answer 12

A) endowment.

Question 13

A competitive equilibrium is Pareto efficient because at the competitive equilibrium,
A) prices have been allowed to adjust.
B) there are no further gains from trade.
C) the final outcome is different from the original inefficient endowment.
D) all members of society can be made better off.

Answer 13

B) there are no further gains from trade.

Question 14

The fact that at the competitive equilibrium nobody can be made better off without making someone else worse off implies that
A) the equilibrium is Pareto efficient.
B) the equilibrium is not Pareto efficient.
C) the prices need to adjust further.
D) further gains from trade are possible.

Answer 14

A) the equilibrium is Pareto efficient.

Question 15

The fact that any Pareto-efficient equilibrium can be achieved through competition by adjusting endowments is called
A) the Second Welfare Theorem.
B) the First Welfare Theorem.
C) the Third Welfare Theorem.
D) That is not possible.

Answer 15

A) the Second Welfare Theorem.

Question 16

The ability to produce a good at a lower opportunity cost than someone else is called
A) competitive production.
B) comparative advantage.
C) selective advantage.
D) absolute advantage.

Answer 16

B) comparative advantage.

Question 17

Every point on the joint production possibilities frontier represents
A) an initial endowment.
B) inefficient production.
C) the marginal rate of substitution of goods for each producer.
D) at least one producer specializing in production.

Answer 17

D) at least one producer specializing in production.

Question 18

At a perfectly competitive equilibrium with production and trade, the slope of the production possibility curve will be
A) equal to the slope of the price line faced by the consumers.
B) steeper than the slope of the price line faced by consumers.
C) flatter than the slope of the price line faced by consumers.
D) either steeper or flatter than the price line faced by the consumers, depending upon the relative preferences of the consumers.

Answer 18

A) equal to the slope of the price line faced by the consumers.

Question 19

In a perfectly competitive equilibrium with production and trade, which of the following results occur(s)?
A) Pareto-efficiency is obtained.
B) The First Welfare Theorem is satisfied.
C) There is efficiency in production.
D) All of the above.

Answer 19

D) All of the above.

Question 20

By saying that MRS = MRT, an economist means that
A) for all goods, the value that society places on the last unit produced equals the cost of making that unit.
B) for all goods, the value that a consumer places on the last unit consumed equals the value that all consumers would place on that unit.
C) society is able to produce more output of one good without reducing the output of any other good.
D) no other output mix is technically feasible.

Answer 20

A) for all goods, the value that society places on the last unit produced equals the cost of making that unit.

Question 21

Suppose the marginal cost of a piece of candy is given by MCc = 2Qc and the marginal cost of a desk is MCd = 4 + 4Qd. The current production levels are 20 pieces of candy and 4 desks. The marginal rate of transformation (MRT) is
A) MRT = -1.
B) MRT = -2.
C) MRT = -4.
D) MRT = -8.

Answer 21

B) MRT = -2.

Question 22

Suppose an economy with two goods (candy and desk) and two identical agents that is in a competitive equilibrium. The marginal cost of a piece of candy is given by MCc = 3Qc and the marginal cost of a desk is MCd = 2 + 2Qd. The current production level of candy is 6 pieces. What is the marginal rate of substitution (MRS)?
A) MRS = -4
B) MRS = -2
C) MRS = 4
D) There is not enough information to calculate the MRS.

Answer 22

D) There is not enough information to calculate the MRS.

Question 23

Suppose in a democratic society, all voters prefer choice G over choice B; however, when the two choices are presented along with a third choice, R, B wins the election. This violates the assumption of
A) transitivity.
B) non-dictatorship.
C) independence of irrelevant alternatives.
D) completeness.

Answer 23

C) independence of irrelevant alternatives.

Question 24

No clearly defined socially preferred outcome may result when majority voting on outcomes because
A) often voters don’t understand the outcomes.
B) voting may violate the independence of irrelevant alternatives.
C) voting may lead to incomplete preferences.
D) voting may lead to non-transitive preference.

Answer 24

D) voting may lead to non-transitive preference.

Question 25

If everyone’s utility is given equal weight and a change in resource allocation results in one person’s gain exceeding another person’s loss, we can say that the new allocation
A) is Pareto superior to the original one.
B) increases social welfare.
C) decreases social welfare.
D) is efficient.

Answer 25

B) increases social welfare.

Question 26

If a society only cares about efficiency and not equity, then
A) all points on the contract curve yield the same level of social welfare.
B) it will not rely on competitive markets to allocate goods.
C) it will maximize the utility of its worst-off member.
D) an equitable outcome is impossible.

Answer 26

A) all points on the contract curve yield the same level of social welfare.

Question 27

A dictator is most likely to
A) adopt a Rawlsian social welfare function.
B) maximize her own utility.
C) place equal weight on everyone’s utility function.
D) have nontransitive preferences.

Answer 27

B) maximize her own utility.

Question 28

Comparing the distribution of wealth of the wealthiest 1% of the population in the United States before and after the recent Great Recession to what occurred before and after the Great Depression,
A) the percentage of the wealth of the wealthiest 1% increased after the recent Great Recession, unlike what happened after the Great Depression.
B) the percentage of the wealth of the wealthiest 1% increased after the recent Great Recession, similar to what happened after the Great Depression.
C) the percentage of the wealth of the wealthiest 1% declined after the recent Great Recession, unlike what happened after the Great Depression.
D) the percentage of the wealth of the wealthiest 1% declined after the recent Great Recession, similar to what happened after the Great Depression.

Answer 28

A) the percentage of the wealth of the wealthiest 1% increased after the recent Great Recession, unlike what happened after the Great Depression.

Question 29

The Arrow impossibility theorem suggests
A) democracies are doomed to fail in the long run.
B) dictatorships are impossible in the long run.
C) there is no universally applicable decision rule in a majority-rule democracy.
D) there is no way to make democracy better than a dictatorship.

Answer 29

C) there is no universally applicable decision rule in a majority-rule democracy.

Question 30

The utilitarian social welfare function
A) is the sum of every member of society’s utilities.
B) gives different weights to the utilities of all people.
C) is the product of every member of society’s utilities. Only poor people benefit from this policy.
D) Both A and B.

Answer 30

A) is the sum of every member of society’s utilities.