Exam 10: General Equilibrium and Economic Welfare

-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.Measuring food on the horizontal axis,the joint production possibility frontier has a horizontal intercept of

-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.Measuring food on the horizontal axis,the joint production possibility frontier has a vertical intercept of

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

Sarah and Andrew are two traders in a pure exchange economic with two goods,Bikes (B)and Computers (C).Sarah's preferences are described by the Cobb-Douglas Utility function: US = BS¹/³ᶜS²/³ Andrew's preferences are given by: UA = BA¹/²ᶜA¹/² Assume the price of Bikes is 1 and the price of computers is p.The initial endowments are BA = 10,BS = 20,CA = 20 and CS = 10.Solve for the competitive equilibrium prices (relative prices)and quantities.

Explain why having different marginal rates of substitution is necessary for trade to occur.

For the following, please answer "True" or "False" and explain why. -When two people trade their initial endowments to a point on the contract curve,only the level of the endowments will determine the new allocation.

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.

-The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Point a is NOT Pareto efficient because

-Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.The U.S.has a comparative advantage in producing

Suppose the U.S.can produce 10 units of food and five units of clothing (or any such linear combination)and Canada can produce six units of food and four units of clothing (or any such linear combination).If trade occurs between these two countries,which should produce more food and which more clothing?

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.The price of clothing is always $1.If the price of food is $3,does a competitive equilibrium exist? If not,what will happen to the price of food?

-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

Employing a general-equilibrium approach,describe the effect of a new law that prohibits steel imports.

-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.Free trade between these two countries will take place

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

An initial allocation of goods is called a(n)

Gains from trade will be possible as long as

Does the contract curve for two traders and two goods always go through the origin (0,0)?

Explain the logic behind the First Theorem of Welfare Economics.

For the following, please answer "True" or "False" and explain why. -A competitive equilibrium is not Pareto efficient if some members of society are unable to afford a necessary good.