Perloff 10.2-10.5 General Equilibrium and Economic Welfare

Question 1

Endowment

Answer 1

an initial allocation of goods

Question 2

Four assumptions about their tastes and behavior for edgeworth box type of stuff

Answer 2

1. ) Utility Maximization: Each per maximizes her utility.
2. ) Usual-Shaped indifference curves. Each person’s have convex shape.
3. ) Nonsatiation
4. ) No Interdependence:

Question 3

Contract Curve (complex)

Answer 3

The contract curve contains all the Pareto-efficient allocations. Any bundle for which one party’s indifference curve is tangent to the other party’s indifference curve falls on this line. This points represent where no further trade is possible because we can’t reallocate goods to make one of them better off without harming the other.

Question 4

A competitive market has two desirable properties

Answer 4

1. ) The competitive equilibrium is efficient

2. ) Any efficient allocations can be achieved by competition

Question 5

Contract Curve (Simple)

Answer 5

the set of all Pareto-efficient bundles

Question 6

Any competitive equilibrium is…

Answer 6

Pareto efficient

Question 7

Comparative Advantage

Answer 7

the ability to produce a good at a lower opportunity cost than someone else.

Question 8

Society maximizes welfare by choosing the allocation for which the highest possible isowelfare curve touches the …

Answer 8

utility possibility fronteir

Question 9

Arrow’s Impossibility Theorem

Answer 9

• Social preferences should be complete and transitive, like individual preferences
• If everyone prefers Allocation a to Allocation b, a should be socially preferred to b.
• Society’s raking of a and b should depend only on individuals ordering of these two allcoations, not on how they rank other alternatives.
• Dictatorship is not allowed; social preferences must not reflect the preferences of only a single individual.

Question 10

Given a particular social welfare function,

Answer 10

society might prefer an inefficient allocation to an efficient one

Question 11

Utilitarian philosophers…

Answer 11

suggested that society should maximize the sum of the utilities of all members of society. The utilities of all people in society are given equal weight.

W = U1 + U2 + ……. + UN

An allocation is judged superior, all else the same, if the person who gets the most pleasure from consuming something are given more of those goods.

Question 12

The simplest and most egalitarian rule is that..

Answer 12

every member of society is given exactly the same bundle of goods. If not further trading is allowed, this rule results in complete equality in the allocation of goods.

Question 13

Rawls Utility Function

Answer 13

Society should maximize the well being of the worst-off member of society, who is the person with the lowest level of utility. In the social welfare function all weight should be placed on the person with the lowest utility.

W = min{U1, U2, …. , UN)

Question 14

Arrow’s theorem: no rank order voting system can be designed that meets the following three criterion for fairness

Answer 14

• If every voter prefers alternative X over alternative Y, then the group prefers X over Y.
• If every voter’s preference between X and Y remains unchanged, then the group’s preference between X and Y will also remain unchanged (even if voters’ preferences between other pairs like X and Z, Y and Z, or Z and W change).
• There is no “dictator”: no single voter possesses the power to always determine the group’s preference