Chapter 15

Question 1

partial equilibrium analysis

Answer 1

the determination of equilibrium in a particular market that assumes there’s no cross-market spillovers

Question 2

general equilibrium analysis

Answer 2

the study of market behavior accounting for cross market influences, concerned with conditions presents when all markets are simultaneously in equilibrium

Question 3

gross substitute

Answer 3

G1 is a gross sub for G2 when the partial derivative with respect to p2 is greater than 0; eq. quant increases

Question 4

gross compliment

Answer 4

g1 is a gross compliment of g2 when the partial derivative with respect to p2 is less than 0; eq. quant decreases

Question 5

if partial derivative w/ respect to p2 =0?

Answer 5

neither a gross sub nor gross comp.

Question 6

social welfare function

Answer 6

a math fxn that combines individual’s utility levels into a single measure of economic performance

Question 7

utilitarian social welfare fxn

Answer 7

every individual in a society’s social welfare fxn summed into one fxn
formula: W=U1+U2+U3….+UN-1+UN

Question 8

weighted social welfare fxn

Answer 8

social welfare fxn that could weigh the utility of different members of society more or less than other members

Question 9

Rawlsian social welfare fxn

Answer 9

fxn that computes society’s welfare as the welfare of the worst-off individual
formula: W=min{U1,U2,U3…UN-1, UN)

Question 10

what drawbacks does choosing a social welfare fxn have?

Answer 10

1. there is no right social welfare fxn, so it’s subjective
2. hard to mathematically combine individual’s utility levels

Question 11

Pareto efficiency

Answer 11

allocation of goods where the goods cannot be reallocated without making at least one individual worse off

Question 12

Pareto improvement

Answer 12

goods can be reallocated to make at least one person better off without making any other individuals worse off

Question 13

exchange efficiency

Answer 13

pareto efficient allocation of a set of goods across consumers

Question 14

input efficiency

Answer 14

pareto efficient allocation of inputs across producers

Question 15

output efficiency

Answer 15

mix of outputs that supports exchange and input efficiencies at the same time

Question 16

edgeworth box

Answer 16

graph of an economy with 2 economic actors an 2 goods used to analyze market efficiency

Question 17

consumption contract curve

Answer 17

curve that shows all the possible pareto-efficient allocations of goods across consumers

Question 18

production contract curve

Answer 18

curve that shows all possible pareto efficient allocations of factor inputs across producers

Question 19

marginal rate of transformation

Answer 19

tradeoff between the production of any goods on the market (slope of line tangent to PPF)
formula: partial derivative of q2 / q1

Question 20

1st fundamental theorem of welfare economics

Answer 20

perfectly competitive markets in GE distribute resources in a pareto efficient way

Question 21

2nd fundamental theorem of welfare economics

Answer 21

any given pareto efficient equilibrium can be achieved by choosing the right initial allocation of goods

Question 22

lump sum transfer

Answer 22

a transfer to or from an individual whose size is unaffected by the individual’s choice