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Exam 16: General Equilibrium and Economic Efficiency

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Question 51

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Which of the following is true? Partial equilibrium analysis will:

A) overstate the impact of a tax for both substitutes and complements.
B) understate the impact of a tax for both substitutes and complements.
C) understate the impact of a tax for complements and overstate the impact for substitutes.
D) understate the impact of a tax for substitutes and overstate the impact for complements.

E) A) and D)
F) A) and B)

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Question 52

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Refer to the diagram below to answer this question. The Edgeworth box diagram above reflects preferences and availability of goods on the two planets Bazaar and Economus. Bananas are only produced on the planet Bazaar while Eggplants are only produced on Economus. Due to the inability to transport goods between the two planets, the current consumption is indicated by point A. What is true about consumers' willingness-to-pay for Eggplants on Bazaar versus the planet Economus? Suppose that due to technological advances on both planets, the two planets may trade costlessly. What is likely to happen? Indicate the changes in the diagram above. Do the planets benefit by trading?

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On Bazaar consumers are willing to give ...

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Question 53

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Use the following statements to answer this question. I. Output efficiency requires that goods are produced in combinations that match people's willingness to pay for the goods. II) Output efficiency requires that goods are produced at costs that match people's willingness to pay for the goods.

Two individuals, A and B, are free to engage in trade of clothing and food. Initially, A has 12 units of clothing and 9 units of food, and B has 8 units of clothing and 11 units of food. The individuals have the following utility functions in clothing C and food F: U_A = 0.15Q_C ∙ Q_F U_B = 0.08Q_C ∙ Q_F where Q_F represents units of food, Q_C represents units of clothing, and U represents utility. Determine if a mutually beneficial trade is possible between A and B. If so, who would trade for what?

For an individual consumer, a corner solution may be optimal such that MRS and MRT are not equal,

Canada produces MP3 players and lumber, and the marginal costs for the two products are $200 per 1,000 board-feet of lumber and $100 per MP3 player. China also produces these goods, and the marginal costs are $300 per 1,000 board-feet of lumber and $100 per MP3 player. Which country has the comparative advantage in lumber production?

The main point of the second theorem of welfare economics is that:

Which of the following is a condition for efficiency in the output market?

Figure 16.2.1 -Refer to Figure 16.2.1 above. The curve that connects points E, F, and G is called:

Use the following statements to answer this question: I. Incomplete information may lead to economic inefficiencies if consumers do not understand the complete set of benefits associated with a particular product. II) Market power can lead to economic inefficiency, but only if the power is held by sellers and not by buyers (e.g., monopsony) .

Which of the following is not a cause of market failure?

When comparing point A, which lies within a utilities possibilities frontier, with point B, which lies on the same utilities possibilities frontier,

In an economy which produces two goods X and Y, using two inputs L and K, efficient input use occurs when:

Coffee and donuts are complements in consumption. Suppose bad weather in the coffee producing regions of the world, which shifts the coffee supply curve leftward. How do the general equilibrium price and quantity outcomes compare to the partial equilibrium outcomes for this situation?

Refer to the diagram below to answer this question. The Edgeworth Box diagram above refers to input usage in the automobile industry and the computer chip industry. The contract curve is given by . All points on this curve correspond to input prices being equivalent across industries. For example, the line segment AC indicates the input price ratio at point B in the two industries. Also, line segment DF indicates the input price ratio at point E in the two industries. The diagram below presents the production possibilities frontier for automobiles and computer chips. The labeled points in the production possibilities frontier diagram correspond to the points A, B, E, and F in the Edgeworth Box diagram above. Which points in the production possibilities frontier diagram correspond to which points in the Edgeworth Box diagram? Why?

Why does perfect competition guarantee a Pareto optimal distribution of goods between two people? Under perfect competition,

Figure 16.3.1 -Assume there are only two individuals in an economy, Lisa and Bart. The utility possibilities frontier for these individuals is given as: 120 = U_L + U_B Where U_L is Lisa's utility and U_B is Bart's utility. Lisa's current level of utility is 20, Bart's level of utility is 90. This combination is:

Two individuals, Dave and Bob, consume two goods, X and Y. The utility functions for the two individuals are given as: Bob's utility function: U_B = 30X^0.25Y^0.75 Dave's utility function: U_D = 50X^0.5Y^0.5 Bob is currently consuming 5 units of X and 10 units of Y. Dave is currently consuming 12 units of X and 8 units of Y. The current prices of X and Y are $10 and $15, respectively. a. Determine the marginal rate of substitution for each individual. b. In light of the information given above, have the two individuals achieved exchange equilibrium? Would it be possible to make one individual better off without harming the other? If the individuals have achieved exchange equilibrium, are other equilibrium combinations of X and Y between the individuals possible?

Refer to the diagram below to answer this question. Suppose the Edgeworth box diagram above pertains to trade between Mexico and the U.S. Before the ratification of the North American Free Trade Agreement (NAFTA), the consumption of computer chips and textiles in both countries is given by point A. At point A, what is true regarding the relative price of computer chips in the U.S. versus Mexico? If the ratification of NAFTA allows trade to bring about the efficient equilibrium, which point in the diagram indicates the level of consumption by each country? At the new equilibrium, what has happened to the price of chips in the U.S.? How do we know both countries are better off by free trade?

One day when Gilligan was diving in the lagoon he came across a gigantic oyster. Gilligan loved raw oysters so he pried the mollusk from the rocks and hastily came ashore. When he pried open the oyster he was surprised to find a huge gray pearl. Gilligan was thrilled at the sight of the large pearl and his immediate thought was to go and tell his friends about it. But then he reconsidered. To whom would he give the pearl? He thought it was pretty, but owning the pearl would not give him any satisfaction. When he thought about it, he realized that the Skipper, Mr. and Mrs. Howell, the Professor, Ginger and MaryAnn would all like to have the pearl. What should he do? He could not give the one pearl to all of his friends. Maybe he could find some more pearls. With this in mind he dove back into the lagoon and returned to the spot where he found the large oyster. Much to his surprise, barely hidden from view was a small colony of oysters. He pried each of them from the rocks and took them all ashore. Inside of each oyster he found a large pearl. Each pearl was as beautiful as the one that he had first discovered. When he had finished opening the oysters he counted his pearls. "One, two, three, four, five. That's it-five pearls." But that's not enough. He did not need a pearl for himself, but he had six friends and only five pearls. Gilligan thought about this problem at least an hour. He finally stood and threw all five pearls back into the lagoon. "If everyone cannot have a pearl, then no one should have a pearl," he thought to himself as he watched the ripples from the pearls spread out across the lagoon. a. Define Pareto optimality. b. Was Gilligan's solution to his problem Pareto optimal? If so, explain why. If not, explain why not.