Chapter 10/General Equilibrium and Economic Welfare



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Figure 10.1

6) Figure 10.1 depicts the Edgeworth box for two individuals, Al and Bruce. The contract curve can found by connecting points

A) a and b.

B) a and c.

C) b and d.

D) c and d.


Answer: D

Diff: 1


Topic: Trading Between Two People
7) If only two people are trading their endowments and no production is possible, then

the equilibrium they reach will



  1. be on their contract curve.

  2. result in unequal marginal rates of substitution for the two people.

  3. result in one person being worse off than with his or her endowment.

  4. All of the above.

Answer: A

Diff: 1

Topic: Trading Between Two People


8) Figure 10.1 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

Diff: 1


Topic: Trading Between Two People
9) Figure 10.1 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 was 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

Diff: 1


Topic: Trading Between Two People
10) Figure 10.1 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

Diff: 1


Topic: Trading Between Two People
11) Figure 10.1 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

Diff: 1


Topic: Trading Between Two People
12) Figure 10.1 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

Diff: 1


Topic: Trading Between Two People
13) 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

Diff: 1


Topic: Trading Between Two People
14) Gains from trade will be possible as long as

A) levels of utility differ.

B) utility functions differ.

C) marginal rates of substitution differ.

D) endowments differ.
Answer: C

Diff: 1


Topic: Trading Between Two People
15) 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

Diff: 1


Topic: Competitive Exchange
16) 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

Diff: 2


Topic: Competitive Exchange
17) 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

Diff: 2


Topic: Competitive Exchange
18) Any competitive equilibrium is Pareto efficient because, with a competitive

equilibrium



  1. the marginal rates of substitution are equal for all consumers.

  2. the price line is the contract curve.

  3. mutual gains from trade exist.

  4. the slope of the price line equals the ratio of the MRS for all consumers.

Answer: A

Diff: 1

Topic: Competitive Exchange


19) 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

Diff: 2


Topic: Competitive Exchange
20) 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

Diff: 1


Topic: Competitive Exchange
21) If pizza is measured on the horizontal axis and pretzels are measured on the vertical axis, the slope of the production possibility frontier at a given combination reflects

A) the total cost of producing that combination.

B) the total cost of producing that quantity of pizza in terms of pretzels.

C) the cost of making the last pizza in terms of pretzels.

D) the cost of making the last pretzel in terms of pizza.
Answer: C

Diff: 1


Topic: Production and Trading


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