Chapter 10/General Equilibrium and Economic Welfare



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Figure 10.5


13) Figure 10.5 shows a production possibility frontier for a society with two members, Al and Bruce. If point "a" is the efficient product mix, draw a possible Edgeworth box and indifference curves.
Answer: The Edgeworth box has 0,0 as the southwest corner and point "a" as the northwest corner. The indifference curves must be tangent where their slopes equal the slope of the PPF at point "a".

Diff: 2


Topic: Production and Trading
14) Suppose the USA can produce 10 units of food and 5 units of clothing (or any linear combination) and Canada can produce 6 units of food and 3 units of clothing (or any linear combination). What type of trade will occur between these two countries? Explain.
Answer: In both countries, 2 units of food must be sacrificed to produce a unit of clothing. Since each country has the same MRT, there are no gains from trade to be made.

Diff: 2


Topic: Production and Trading
15) If a market is controlled by one perfect price discriminator who is able to charge each consumer the highest price that consumer is willing to pay, the seller will produce output until the price paid by the last consumer is equal to the marginal cost of making the good. That is, the price of the last good equals the marginal cost of making the good. If welfare is measured as consumer surplus plus producer surplus, compare this market structure to a competitive market in terms of efficiency and equity.
Answer: A perfect price discriminator is Pareto efficient. Producer surplus plus consumer surplus is the same as in a competitive market. From an equity standpoint, however, there is much less equity than in a competitive market. A perfect price discriminator can capture all of the consumer surplus for herself, leaving consumer surplus equal to zero.

Diff: 2


Topic: Efficiency and Equity
16) Explain why a government may select an inefficient allocation.
Answer: A government may decide the equity of an allocation makes it preferable to all possible efficient allocations

Diff: 1


Topic: Efficiency and Equity





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