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Exam 10: General Equilibrium and Economic Welfare

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Question 31

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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.

E) A) and B)
F) B) and C)

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Question 32

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How does competition ensure that the efficient product mix is attained?

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In a competitive market,producers choose...

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Question 33

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Explain how it is possible for one of two people in a two-good economy to have an absolute advantage in producing both goods,but trade can still benefit both people.

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

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?

Can it be efficient for one trader to consume all units of the goods while the other trader consumes nothing? In other words,does this point lie on the contract curve?

Gains from trade will be possible as long as

If two grade-school children willingly trade their lunches with one another,we can conclude that at least one of them preferred the other's lunch to his own.

-Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Assuming free trade between these two countries,Canada will produce food

-The above figure depicts the Edgeworth box for two individuals,Al and Bruce.The contract curve can be found by connecting points

The competitive equilibrium determines the absolute price of each of the goods based on the endowments and marginal rates of substitution.

Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 20 units of clothing but no food.Suppose each has the utility function U = F ∗ C.Derive the contract curve.

Robinson starts out with 10 lobsters and five coconuts.Friday starts out with 10 lobsters and 15 coconuts.After trading,Robinson ends up with eight lobsters and 10 coconuts.Robinson feels neither better nor worse off than when he started but cannot get Friday to agree to any more trades.Friday feels better off than when he started.Draw the Edgeworth box consistent with this story.

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.

According to the Fundamental Theorems of Welfare Economics,the competitive equilibrium is dependent on the relative bargaining powers of the parties trading.

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?

Can consumption efficiency be achieved even if the efficient product mix is not achieved?

Suppose that the minimum wage covers all sectors of the economy;however,for unionized laborers,the minimum wage is ineffective.That is,the union wage is already above the minimum wage.Analyze the impact of an increase in the minimum wage on both the unionized and non-unionized labor markets.(Assume that the higher minimum wage is still ineffective in the unionized sector and that union and nonunion labor are substitutable. )

-Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Assuming that consumers place equal value on both of these goods and that free trade between these two countries is possible,gains from trade

Suppose the U.S.can produce 10 units of food and five units of clothing (or any linear combination)and Canada can produce six units of food and three units of clothing (or any linear combination).What type of trade will occur between these two countries? Explain.