Microeconomics: Theory and Applications with Calculus, 4e, Global Edition (Perloff)

Chapter 10 General Equilibrium and Economic Welfare

10.1 General Equilibrium

1) General-equilibrium analysis is the study of

A) how an equilibrium is determined in all markets simultaneously.
B) how an equilibrium is determined in all closely related markets.
C) the effects of a change in a market, and all spillover effects in all related markets.
D) All of the above.
Answer: D

2) As opposed to general-equilibrium analysis, partial equilibrium analysis looks

A) at an equilibrium and changes to it in a single, isolated market.
B) at how changes in one market effect other markets.
C) at how equilibrium is determined in all markets simultaneously.
D) at either price or quantity movements.
Answer: A

3) A general-equilibrium analysis of a price change in the corn chip market would include an
investigation of the impacts in
A) the television market.
B) the coffee market.
C) the salsa market.
D) All of the above.
Answer: C

4) A general-equilibrium analysis of the impact of a tax on the peanut butter market would
include an investigation of the impacts in
A) the television market.
B) the coffee market.
C) the salsa market.
D) the jelly market.
Answer: D

5) The general-equilibrium analysis of a minimum wage applied to only some sectors of the
economy suggests that
A) workers in all sectors will face increased wages.
B) some workers in the covered sectors will lose their jobs and remain unemployed.
C) some workers originally employed in the covered sectors will move to the uncovered sectors,
driving down wages in the uncovered sectors.
D) all workers will be worse off.
Answer: C

6) When the U.S. minimum wage was first passed in 1938, only 56% of workers were employed
in covered firms. The incomplete coverage suggests that
A) the partial equilibrium ignores the movement of workers from uncovered sectors to covered
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sectors.
B) the decrease in employment is higher in general-equilibrium analysis.
C) the general-equilibrium analysis predicts the wage in uncovered sectors will fall.
D) all the workers will be worse off in both general- and partial-equilibrium analysis.
Answer: C

7) When comparing partial-equilibrium effects to general-equilibrium effects, one can conclude

that
A) general-equilibrium effects are always larger.
B) partial-equilibrium effects are always larger.
C) the effects are of equal size.
D) one cannot determine before the fact which effect is greater.
Answer: D

10.2 Trading Between Two People

1) Joe and Rita each have some cookies and milk. Joe is willing to trade 2 cookies for an
additional ounce of milk. Rita is willing to trade four cookies for an additional ounce of milk. If
trading is possible, which of the following is most likely to occur?
A) Joe will give some milk to Rita in exchange for cookies.
B) Rita will give some milk to Joe in exchange for cookies.
C) No trade will take place since they both prefer to have more milk and fewer cookies.
D) There is not enough information to make any predictions.
Answer: A

2) Joe and Rita each have some milk and cookies (Milk on the horizontal axis). Joe's MRS of
cookies for milk is two. Rita's MRS of cookies for milk is four. Which of the following
statements is TRUE?
A) No gains from trade are possible.
B) Both Rita and Joe can be made better off if Rita gives Joe some cookies in exchange for milk.
C) Rita and Joe are on the contract curve.
D) Both Rita and Joe can be made better off if Joe gives Rita some cookies in exchange for milk.
Answer: B

3) Gains from trade can only occur when

A) marginal rates of substitutions differ across people.
B) marginal rates of substitution are equal across people.
C) indifference curves are convex.
D) people find themselves on the contract curve.
Answer: A

4) Moving away from the contract curve will

A) harm both parties.
B) harm only one of the parties.
C) harm at least one of the parties.
D) harm neither of the parties.
Answer: C
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5) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. The contract
curve can be found by connecting points
A) a and b.
B) a and c.
C) b and d.
D) c and d.
Answer: D

6) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. Points a and b
A) are most likely to reflect the final endowments after trading.
B) are least likely to reflect the final endowments after trading.
C) are equally likely to reflect the final endowments after trading than other points on the
contract curve.
D) are definitely not the final endowments after trading.
Answer: B

7) If only two people are trading their endowments and no production is possible, then the
equilibrium they reach will
A) be on their contract curve.
B) result in unequal marginal rates of substitution for the two people.
C) result in one person being worse off than with his or her endowment.
D) All of the above.
Answer: A

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8) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. If the
endowment is at point a and trade is possible, which of the following points are possible
equilibria?
A) a and b
B) a and c
C) b and d
D) c and d
Answer: D

9) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. Considering
only the labeled points, point c is a possible equilibrium
A) only if it is the endowment.
B) only if point a is the endowment.
C) if either point a or b is the endowment.
D) only if point d is the endowment.
Answer: C

10) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. If the
endowment is at point a, and Al has no ability to bargain, the final allocation will be at point
A) a.
B) b.
C) c.
D) d.
Answer: C

11) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. If the
endowment is at point a, and Bruce has no ability to bargain, the final allocation will be at point
A) a.
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B) b.
C) c.
D) d.
Answer: D

12) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. Point a is
NOT Pareto efficient because
A) Al's MRS exceeds Bruce's MRS.
B) the point is not near the center of the box.
C) Al's indifference curve is not far enough away from the origin.
D) All of the above.
Answer: A

13) The above figure depicts the Edgeworth Box for two individuals, Al and Bruce. Point c is
Pareto efficient because
A) the MRS's are equal.
B) the indifference curves are tangent.
C) no mutual gains from trade exist.
D) All of the above.
Answer: D

14) When considering trade of two goods between two people, if one person has all the
endowment of both goods, this allocation
A) is never on a contract curve.
B) will result in trade so each person has all of one good.
C) will result in trade to a equal division of goods between the two people.
D) is Pareto efficient.
Answer: D

15) When two people are on the contract curve, the allocation of goods
A) cannot be improved.
B) is pareto efficient.
C) is such that neither individual can be made better off without making the other worse off.
D) All of the above.
Answer: D

16) Gains from trade will be possible as long as

A) people have different endowments.
B) people place different values on some goods.
C) marginal rates of substitution are equal across individuals.
D) excess supply equals excess demand.
Answer: B

17) Gains from trade will be possible as long as

A) levels of utility differ.
B) utility functions differ.
C) marginal rates of substitution differ.
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D) endowments differ.
Answer: C

18) The assumptions about tastes and behavior to model the trading between two people do NOT
include
A) utility maximization.
B) convex indifference curves.
C) nonsatiation.
D) interdependence.
Answer: D

10.3 Competitive Exchange

1) The First Theorem of Welfare Economics can be expressed as

A) the competitive equilibrium results only when no transactions costs exist.
B) the competitive equilibrium does not involve reallocation of endowments.
C) any efficient allocations can be achieved by competition.
D) the competitive equilibrium is efficient.
Answer: D

2) An initial allocation of goods is called a(n)

A) endowment.
B) inheritance.
C) pareto set.
D) general-equilibrium goods set.
Answer: A

3) In a competitive marketplace, prices adjust until

A) MRS's are equal to zero.
B) excess supply equals excess demand equals zero in all markets.
C) each consumer has maximized utility subject to his budget constraint.
D) all firms earn zero profit.
Answer: B

4) A competitive equilibrium is Pareto efficient because at the competitive equilibrium,

A) prices have been allowed to adjust.
B) there are no further gains from trade.
C) the final outcome is different from the original inefficient endowment.
D) all members of society can be made better off.
Answer: B

5) A competitive equilibrium is Pareto efficient because at the competitive equilibrium,

A) prices reflect the differences in marginal rates of substitution across individuals.
B) there are no further gains from trade.
C) there is an equal distribution of the goods.
D) everyone has the same level of utility.
Answer: B
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6) The fact that at the competitive equilibrium nobody can be made better off without making
someone else worse off implies that
A) the equilibrium is pareto efficient.
B) the equilibrium is not pareto efficient.
C) the prices need to adjust further.
D) further gains from trade are possible.
Answer: A

7) Any competitive equilibrium is Pareto efficient because with a competitive equilibrium,

A) the marginal rates of substitution are equal for all consumers.
B) the price line is the contract curve.
C) mutual gains from trade exist.
D) the slope of the price line equals the ratio of the MRS for all consumers.
Answer: A

8) The fact that any pareto efficient equilibrium can be achieved through competition by
adjusting endowments is called
A) the second welfare theorem.
B) the first welfare theorem.
C) the third welfare theorem.
D) That is not possible.
Answer: A

9) For a given set of prices, two consumers choose bundles that are off the contract curve. In a
competitive market,
A) prices will adjust until the consumers choose bundles that are on the contract curve.
B) the indifference curves will shift back to the contract curve.
C) the contract curve will shift to connect these bundles.
D) no adjustments need to be made.
Answer: A

10) In a competitive market, prices adjust until all consumers find themselves
A) maximizing utility.
B) on the contract curve.
C) happy with their original endowment.
D) with many opportunities to gain from additional exchange.
Answer: B

11) There are two consumers in the market, Jack and Jane. Each have some coffee and candies
(coffee on the horizontal axis). Jack's MRS of candies for coffee is 3. Jane's MRS of candies for
coffee is 3. Which one of the following statements is incorrect?
A) This allocation is on the contract curve.
B) This can be a competitive equilibrium.
C) This allocation is Pareto efficient.
D) We can reallocate goods so as to make one person better off without harming another.
Answer: D

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12) Consider a society consisting of just a farmer and a tailor. The farmer has 10 units of food
but no clothing. The tailor has 40 units of clothing but no food. Suppose each has the utility
function U = F ∗ C. The price of clothing is always $1. What is the competitive equilibrium price
for food?
A) $5
B) $4
C) $3
D) $2
Answer: B

13) Consider a society consisting of just a farmer and a tailor. The farmer has 10 units of food
but no clothing. The tailor has 40 units of clothing but no food. Suppose each has the utility
function U = F1/2C1/2. If the price of clothing is always $1, and the food price is currently $3,
then we can conclude
A) the market is at a competitive equilibrium.
B) the price of food will drop towards a competitive equilibrium.
C) the price of food will increase towards a competitive equilibrium.
D) None of the above.
Answer: C

14) Consider a society consisting of just a farmer and a tailor. The farmer has 30 units of food
but no clothing. The tailor has 60 units of clothing but no food. Suppose each has the utility
function U = F1/3C2/3. If the price of clothing is always $1, and the food price is currently $1,
then we can conclude
A) the market is at a competitive equilibrium.
B) the price of food will drop towards a competitive equilibrium.
C) the price of food will increase towards a competitive equilibrium.
D) None of the above.
Answer: A

10.5 Efficiency and Equity

1) Any policy change that results in a Pareto-superior allocation

A) will increase welfare under certain conditions.
B) must increase welfare.
C) will leave welfare unchanged.
D) will have an unpredictable effect on welfare.
Answer: B

2) A cake is to be shared by two people. Both desire the largest piece possible. One of the two
will cut the cake. Under which of the following situations will the cutter adopt a Rawlsian social
welfare function?
A) The person cutting the cake chooses the first piece.
B) The person not cutting the cake chooses the first piece.
C) The two individuals will bid for the right to cut the cake and choose first.
D) The two individuals will toss a coin for the right to cut the cake and choose first.
Answer: B
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3) Suppose in a democratic society, all voters prefer choice G over choice B; however, when the
two choices are presented along with a third choice, R, B wins the election. This violates the
assumption of
A) transitivity.
B) non-dictatorship.
C) independence of irrelevant alternatives.
D) completeness.
Answer: C

4) No clearly defined socially preferred outcome may result when majority voting on outcomes
because
A) often voters don't understand the outcomes.
B) voting may violate the independence of irrelevant alternatives.
C) voting may lead to incomplete preferences.
D) voting may lead to non-transitive preference.
Answer: D

5) If everyone's utility is given equal weight and a change in resource allocation results in one
person's gain exceeding another person's loss, we can say that the new allocation
A) is Pareto superior to the original one.
B) increases social welfare.
C) decreases social welfare.
D) is efficient.
Answer: B

6) If price support policy increases producer surplus more than reducing consumer surplus, then
A) the policy leads to a Pareto-superior allocation.
B) the policy leads to an increase in social welfare.
C) the policy improves the efficiency of society.
D) None of above.
Answer: D

7) If a society only cares about efficiency and not equity, then

A) all points on the contract curve yield the same level of social welfare.
B) it will not rely on competitive markets to allocate goods.
C) it will maximize the utility of its worst-off member.
D) an equitable outcome is impossible.
Answer: A

8) If a society relies on competitive markets to allocate goods, then

A) an equitable distribution is assured.
B) an equitable distribution is certain to not occur.
C) the competitive equilibrium will be Pareto superior to any other.
D) social welfare as measured by consumer surplus plus producer surplus will equal zero.
Answer: C

9) A dictator is most likely to

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A) adopt a Rawlsian social welfare function.
B) maximize her own utility.
C) place equal weight on everyone's utility function.
D) have nontransitive preferences.
Answer: B

10) If society were to maximize the utility of its worst-off member, the final allocation would
most likely be
A) relatively egalitarian.
B) on the contract curve.
C) Pareto efficient.
D) one in which one person gets everything.
Answer: A

11) If society were to maximize the utility of its best-off member, the final allocation would be
A) perfect equity.
B) on the contract curve.
C) Pareto efficient.
D) one in which one person gets everything.
Answer: D
Topic: Efficiency and Equity
Skill: Analytical thinking
Status: Old

12) For most commonly used social welfare functions, an efficient allocation is
A) always preferred over any inefficient allocation.
B) not possible.
C) usually preferred.
D) never preferred.
Answer: C

13) Suppose the corn-producing industry of the U.S. is a price taker in the world market and
government puts a ban on imports. The corn industry also receives subsidy from the home
government. Then
A) social welfare will increase if the ban on imports is removed.
B) everyone will be better off if both ban on imports and subsidy are removed.
C) social efficiency will be improved if both ban on imports and subsidy are removed.
D) the deadweight loss is reduced if subsidy is removed.
Answer: C

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