General equlibirm

Question 1

Explain what it means for an allocation of resources to be Pareto optimal.

Answer 1

An allocation of goods (or resources) is Pareto optimal when there is no possibility of redistribution in a way where at least one individual would be better off while no other individual ends up worse off

Question 2

Give 5 characteristics required by the first welfare theorem for a market to be Pareto optimal.

Answer 2

• No transaction costs
• Perfect information
• Price taker
• No barriers to entry
• Non-satiation

Question 3

Explain the second welfare theorem using a progressive tax system as an example.

Answer 3

The second welfare theorem states that you can end up anywhere on the contract curve if you
reallocate the initial allocation of resources. A progressive tax reallocates resources from the wealthy to the poor, without directly changing the price of a specific good

Question 4

What is the first welfare theorem?

Answer 4

A marker will tend towards a competitive equilibrium that is Pareto optimal.

Question 5

What does the second welfare theorem state?

Answer 5

Out of all possible Pareto, optimal outcomes one can achieve any particular one by enacting a lump-sum wealth redistribution and then letting the market take over.

Question 6

What is input efficiency?

Answer 6

When a fixed stock of inputs cannot be reallocated among firms in an economy without reducing the output of at least one other firm.

Question 7

What is substitution efficiency?

Answer 7

Given the total amount of capital labour available in the economy, there is no way to make consumers better off by providing more of one product.

Question 8

What is the exchange efficiency?

Answer 8

When a fixed stock of consumption goods cannot be reallocated among consumers in an economy without making at least some consumers worse off.