Sen, Hicks and Arrow

Question 1

What social choice theory did Sen reject and why?

Answer 1

Arrow’s impossibility theorem: cannot be sure that public preferences determined by voting are rational.

Sen believed that making social policy decisions without social preferences were wrong. If governments want to address important economic issues they need a method to determine national preferences.

Question 2

How did Sen improve the the “rejected” social choice theory? Explain.

Answer 2

Introduced preference intensity but for it to work interpersonal comparisons had to be allowed (Who rejects this idea ?)

Question 3

Whose views on social choice and inequality did Sen borrow ideas from and what did he criticise about them?

Answer 3

Bentham (utilitarianism) - gives no consideration to equity

Pareto - pareto optimality is unsatisfactory criterion for distribution (inequality)

Malthus - in case of famine, there is not only a problem of food supply but also acquiring it. (New idea of boom and slump famines)

Question 4

What did Sen propose Western governments do to prevent food shortages?

Answer 4

They should trade with democracies so that everyone in the two nations benefit and not with dictatorships otherwise the dictators benefit.

Question 5

What are the similarities and differences in Hicks and Arrow’s theories?

Answer 5

Both: contributions to general economic equilibrium theory and welfare theory

Hicks: General equilibrium theory - Substitution and income effects and the IS/LM diagram

Arrow: General equilibrium theory - Proof existence of competitive equilibrium and Imperfect/asymmetric information in markets

Question 6

Which economist talked about moral hazard and adverse election?

Answer 6

Arrow

Question 7

Which economist created the IS/LM model?

Answer 7

Hicks

Question 8

Briefly explain how Hicks contributed to general equilibrium theory?

Answer 8

He created an economic equilibrium model that could account for more real-world situations e.g., multimarket stability, and the role of prices via income and sub effects.

Question 9

What does the IS/LM model have to do with Keynes?

Answer 9

The diagram explains Keyne’s theory of interest rates and national income.

The model creates a relationship between national income (via investment) and interest rates (via liquidity preference)

Question 10

The diagram explains Keyne’s theory of interest rates and national income.

The model creates a relationship between national income (via investment) and interest rates (via liquidity preference)

Answer 10

Proves fiscal policy & expansionary monetary (only if ^ MS > reduction in r) effective to increase output.

Question 11

What is the significance of Arrow’s work if all his concepts were not original theories?

Answer 11

He was able to mathematically prove the existence of an equilibrium, effect of imperfect information and the welfare theorems of Pareto optimum.