chapter16

2) General equilibrium analysis is different from partial equilibrium analysis in that general equilibrium analysis A) explicitly takes feedback effects into account and partial equilibrium analysis does not. B) does not take into consideration specific problems, but partial equilibrium analysis does. C) takes into consideration specific problems, but partial equilibrium analysis does not. D) allows one to arrive at a specific conclusion, but partial equilibrium analysis does not.

a

46) A point lying beyond the utilities possibilities frontier is A) unattainable. B) efficient. C) inefficient. D) profitable.

a

73) Canada produces MP3 players and lumber, and the marginal costs for the two products are $200 per 1,000 board-feet of lumber and $100 per MP3 player. China also produces these goods, and the marginal costs are $300 per 1,000 board-feet of lumber and $100 per MP3 player. Which country has the comparative advantage in lumber production? A) Canada B) China C) Both countries share the comparative advantage. D) We need more information to answer this question.

a

81) Externalities can lead to inefficient economic outcomes because: A) firms do not have to pay the full cost associated with using inputs that cause pollution. B) firms that produce public goods tend to be monopolies. C) Both A and B are correct. D) none of the abov

a

40) What does the negative slope of the utilities possibilities frontier imply? A) Diminishing marginal utility. B) The only way to increase one personʹs utility is to decrease another personʹs utility. C) Diminishing marginal rates of substitution. D) The only way to increase output of one good is to decrease output of another.

b

45) From a point within the utilities possibilities frontier, A) movement to another point within the frontier can only increase one personʹs utility, but not both peopleʹs utility. B) it is possible to find another point within the frontier that generates higher utility for both people. C) it is possible to find another point within the frontier that involves higher output of both goods. D) any move to another point within the frontier will necessarily decrease someoneʹs utility.

b

48) Locating a point on a utilities possibilities frontier gives you information about A) both equity and efficiency. B) equity but not efficiency. C) efficiency but not equity. D) profitability but not efficiency.

c

67) Which of the following is not a cause of market failure? A) Incomplete information B) Externalities C) Individuals acting according to their own self-interest D) Public goods

c

77) Suppose MRTS is not the same across all producers. In this case, the economic outcome is not fully efficient because: A) exchange is inefficient. B) the use of inputs in production is inefficient. C) the mix of outputs in inefficient. D) none of the above

b

30) All possible efficient allocations of 2 goods between 2 people are located on A) the indifference curve. B) the contract curve. C) the production possibilities frontier. D) the budget line.

b

38) The slope of the utility possibilities frontier is A) positive. B) negative C) zero. D) undefined.

b

53) The Rawlsian view of equity would lead to: A) equal allocations of goods across all persons. B) maximizing the utility of the least-well-off person. C) maximizing the total utility of all society members. D) none of the above

b

57) The slope of the production possibilities frontier is A) positive. B) negative. C) zero. D) undefined.

b

41) All points within the utilities possibilities frontier are A) unattainable. B) efficient. C) inefficient. D) profitable.

c

58) What is TRUE about every point along a production possibilities frontier? A) Both people are maximizing utility. B) It is impossible to increase production of either good. C) All allocations are efficient. D) It includes some unattainable points.

c

60) All points within the production possibilities frontier are A) unattainable. B) efficient. C) inefficient. D) profitable.

c

11) An allocation in which one person can be made better off only by making someone else worse off is A) inefficient. B) efficient. C) a partial equilibrium. D) a general equilibrium.

b

12) An efficient allocation of goods in an exchange economy means that A) goods were produced by the most efficient technology available. B) no one can be made better off without making somebody else worse off. C) those made worse off are not hurt as badly as the benefits resulting from those made better off. That is, there is a net positive gain. D) in a particular production process one gets the maximum output for a given input.

b

16) The contract curve in an Edgeworth Box diagram illustrates A) the only efficient allocation of goods among individuals. B) all possible efficient allocations of goods among individuals. C) all equitable distributions of goods among individuals. D) the only equitable distribution of goods among individuals.

b

28) If the initial distribution of labor and capital is Pareto optimal, which of the following statements is TRUE? A) It is possible to reallocate labor and capital across industries so as to increase the production of one good without decreasing the production of another good. B) It is possible to reallocate labor and capital across industries so as to increase the production of one good, but only by reducing the production of another good. C) It is possible to reallocate labor and capital across industries so as to increase the production of every good. D) none of the above

b

29) Why does perfect competition guarantee a Pareto optimal distribution of goods between two people? Under perfect competition, A) everyone has the same preferences. B) everyone faces the same prices. C) everyone consumes the same quantity of both goods. D) goods are homogeneous.

b

32) Once a point on a contract curve has been chosen, A) it is possible to make both individuals better off. B) it is possible to make one individual better off only at the expense of the other. C) there is no change that would make both individuals worse off. D) it is impossible for both individuals to have more of both goods.

b

33) In an Edgeworth box, all points of efficiency occur at the A) intersections of the indifference curves. B) the points of tangency between the sets of indifference curves. C) in the midpoint of the diagram. D) at any point other than the intersections of the indifference curves.

b

4) The markets for movie theater tickets and videocassette rentals are highly interdependent. Suppose that a tax is imposed on movie theater tickets. The type of analysis that examines the effects of this tax on the markets for movie theater tickets and videocassettes simultaneously is called A) macroeconomics. B) general equilibrium analysis. C) partial equilibrium analysis. D) full market analysis. E) psychoanalysis.

b

6) Gasoline and bicycles are complements in consumption. Suppose we increase the federal gasoline tax to $1 per gallon. What are the initial changes that result from the tax as these markets adjust to a new general equilibrium? A) Gasoline price rises, demand for bicycles shift s leftward. B) Gasoline price rises, demand for bicycles shifts rightward. C) Gasoline price rises, move downward along bicycle demand curve. D) Gasoline price rises, move upward along bicycle demand curve.

b

64) Why is the production possibilities frontier concave to (bowed away from) the origin? A) Consumers have declining marginal utility, so their relative satisfaction from consuming a good changes as they move from high levels to low levels of consumption. B) The shape of the curve is due to the marginal costs of producing the two goods. At high levels of output for a particular good, the marginal cost is very high, and the firm can use the same inputs to produce a relatively large quantity of the other good. C) For a production possibilities frontier, we no longer assume firms are price takers, and the input prices and output prices change as the firms alter their mix of outputs. D) none of the above

b

7) Gasoline and bicycles are complements in consumption. Suppose we increase the federal gasoline tax to $1 per gallon. Initially, the gasoline price rises due to the tax, and the demand curve for bicycles shifts rightward because these goods are complements. What are the secondary changes that result from the gasoline tax as these markets adjust to a new general equilibrium? A) Bicycle price rises, demand for gasoline shift s leftward. B) Bicycle price rises, demand for gasoline shifts rightward. C) Bicycle price declines, demand for gasoline shifts leftward. D) Bicycle price declines, demand for gasoline shifts rightward.

b

79) If one of the agents in an Edgeworth Box has monopoly power and maximizes profit as the sole seller, then the economic outcome is: A) inefficient because the monopoly has no incentive to be technically efficient. B) inefficient because the monopoly produces less than the optimal amount of output. C) Both A and B are correct. D) none of the above

b

26) If the initial distribution of two goods between two people is Pareto optimal, which of the following statements is TRUE? A) It is possible to reallocate the goods between the two people so as to increase the utility of both people. B) It is possible to reallocate the goods between the two people so as to increase the utility of one person without decreasing the utility of the other. C) It is possible to reallocate the goods between the two people so as to increase the utility of one person, but only at the expense of the other person. D) It is impossible to reallocate the goods between the two people so as to increase either personʹs utility. E) none of the above

c

27) Suppose there is a water shortage, and the governor proposes that the government distribute equal quantities of water to each person at no cost to the consumers. If consumers were forbidden to trade water, would such a distribution be Pareto optimal? A) Yes, because each person has the same amount of water as everyone else. B) Yes, because everyone would be receive their water for free. C) Not necessarily, as people may differ in their marginal rates of substitution between water and other goods. D) It is impossible to determine without knowing the price of water. E) none of the above

c

31) A move from one point on a contract curve to another point on the contract curve will make A) both individuals better off. B) both individuals worse off. C) one individual better off and the other individual worse off. D) the goods more expensive.

c

34) The statement: ʺIf everyone trades in the competitive marketplace, all mutually beneficial trades will be completed, and the resulting equilibrium allocation of resources will be economically efficient.ʺ is formally known as: A) the law of supply and demand. B) the first theorem of supply and demand. C) the first theorem of welfare economics. D) the first theorem of efficiency in economics.

c

36) For an individual consumer, a corner solution may be optimal such that MRS and MRT are not equal, A) but this is not possible in an Edgeworth Box due to the transitivity of preferences. B) but this is not possible in an Edgeworth Box because price ratios must be positive. C) and this may also occur in an Edgeworth Box. D) and this may only occur in an Edgeworth Box under the perfect complements case.

c

39) What is TRUE about every point along a utilities possibilities frontier? A) Markets are perfectly competitive. B) It is possible to move to from one point on the frontier to another point and make everyone better off. C) All allocations are efficient. D) It includes some unattainable points.

c

44) Which of these statements is generally accepted by economists? Perfect competition A) provides both equity and efficiency. B) provides equity but not necessarily efficiency. C) provides efficiency but not necessarily equity. D) generally satisfies neither efficiency nor equity.

c

47) When comparing point A, which lies within a utilities possibilities frontier, with point B, which lies on the same utilities possibilities frontier, A) both A and B are efficient. B) both A and B are equitable. C) both A and B may be equitable. D) neither A nor B could be equitable.

c

49) When comparing point A, which lies within a utilities possibilities frontier, with point B, which lies on the same utilities possibilities frontier, A) A is necessarily more efficient than B. B) A is necessarily more equitable than B C) B is necessarily more efficient than A. D) B is necessarily more equitable than A.

c

50) When comparing point A, which lies within a utilities possibilities frontier, with point B, which lies on the same utilities possibilities frontier, A) A may be more efficient than B. B) A is necessarily more equitable than B. C) B may be more equitable than A. D) B is necessarily more equitable than A.

c

54) A competitive equilibrium is efficient in the production and exchange of two goods X and Y when A) MRSxy = MRTLK (where L = labor input and K = capital input). B) MRTxy = MRSLK (where L = labor input and K = capital input). C) MRSxy = MRTxy. D) MCX/MCY = PY/PX.

c

61) From any point within the production possibilities frontier, A) the only way to increase production of one good is to decrease production of the other. B) it is possible to increase both peopleʹs utility. C) it is possible to increase output of both goods. D) any move will necessarily decrease production of some good.

c

68) Use the following statements to answer this question. I. There are potential gains from trade when the economies of two countries differ so that one country has an absolute advantage in producing one good, while the second country has an absolute advantage in producing another good. II. A country has an absolute advantage in producing a good if its cost is lower than the cost in another country. A) Both I and II are true. C) I is false, and II is true. Answer: C Diff: 2 Section: 16.5 B) I is true, and II is false. D) Both I and II are false.

c

3) The United States and Brazil are competitors in the world soybean market. In the late 1960s and early 1970s, the Brazilian government developed regulations designed to encourage Brazilian soybean production and exports. An unanticipated effect of the Brazilian regulations was to stimulate U.S. soybean production and exports. The type of economic analysis that would explain and predict these effects is called A) closed economy macroeconomics. B) international economics. C) partial equilibrium analysis. D) full market analysis. E) general equilibrium analysis.

e

62) A point lying to the northeast of the production possibilities frontier is A) unattainable. B) efficient. C) inefficient. D) profitable.

a

13) In a problem involving exchange, the contract curve shows A) all exchanges that make both parties better off. B) the one exchange that makes both parties better off. C) all possible allocations of goods between both parties. D) all possible efficient allocations between both parties.

d

1) Which of these is NOT an exercise in general equilibrium analysis? A) A discussion of factors within the wheat market that influence wheat prices B) An analysis of the effects of changes in oil prices upon the natural gas market C) An evaluation of relationships between the markets for tires and automobiles D) none of the above

a

35) Suppose there are 10 apples and 10 oranges in the economy. Joe is currently consuming 4 apples and 5 oranges, and Jane is consuming 6 apples and 5 oranges. At this allocation, Joeʹs marginal utility of apples is 3, and his marginal utility of oranges is 5. Janeʹs marginal utility of apples is 9. The current allocation is necessarily efficient if: A) the price of apples is 60% of the orange price. B) Janeʹs marginal utility of oranges is 6 at this point. C) Joeʹs MRS equal the MRT. D) Janeʹs marginal utility of oranges is 15 at this point.

a

43) Assume there are only two individuals in an economy, Lisa and Bart. The utility possibilities frontier for these individuals is given as: 120 = UL + UB where UL is Lisaʹs utility and UB is Bartʹs utility. Lisaʹs current level of utility is 20, Bartʹs level of utility is 90. This combination is: A) inefficient. B) economically efficient. C) impossible, because it is outside of the welfare frontier. D) none of the above

a

63) The slope of the production possibilities frontier is defined to be the marginal rate of A) transformation. B) technical substitution. C) substitution. D) profit.

a

65) Suppose an economy produces milk and honey, and milk is plotted along the horizontal axis of the production possibilities frontier. If the production in the economy is centrally planned (and not market oriented) so that the MRS for the current production level is 3 but the MRT is 2, then there will be an excess __________ for milk and an excess __________ for honey. A) demand, supply B) demand, demand C) supply, demand D) supply, supply E) The market is in equilibrium, and there are no imbalances in supply or demand.

a

76) An economy produces outputs X and Y using inputs L and K. Which of the following is NOT required for economic efficiency? A) MRTSLK = MRSXY for all producers and consumers. B) MRTXY = MRSXY for all producers and consumers. C) MRSXY is equal for all consumers. D) MRTSLK is equal for all producers. E) None of the above. All of these are required for economic efficiency.

a

78) Suppose MRS is not the same across all consumers. In this case, the economic outcome is not fully efficient because: A) exchange is inefficient. B) the use of inputs in production is inefficient. C) the mix of outputs in inefficient. D) none of the above

a

74) Canada produces MP3 players and lumber, and the horizontal axis for Canadaʹs production possibilities frontier represents the amount of lumber produced. Canadaʹs borders are not initially open to trade, and the country consumes along its production possibilities frontier where the MRT and MRS equal the price ratio for the two products ($200 per 1,000 board -feet of lumber versus $100 per MP3 player). If Canada opens its borders to trade with China at world prices for the two goods ($300 per 1,000 board-feet of lumber and $100 per MP3 player), what happens in the Canadian economy? A) Canada will shift consumption along the original production possibilities frontier until MRT equals the world price ratio, and Canadians will consume less lumber and more MP3 players. B) Canada will shift consumption along the original production possibilities frontier until MRT equals the world price ratio, and Canadians will consume more lumber and less MP3 players. C) Canada will be able to trade with China, and the gains from trade allow Canada to afford bundles of the two goods that do not lie along the countryʹs production possibilities frontier. D) Canada may trade with China, but we do not have enough information to determine how the opening of the border will affect the trade decisions.

c

75) Canada produces MP3 players and lumber, and the horizontal axis for Canadaʹs production possibilities frontier represents the amount of lumber produced. Canadaʹs borders are not initially open to trade, and the country consumes along its production possibilities frontier where the MRT and MRS equal the price ratio for the two products ($200 per 1,000 board -feet of lumber versus $100 per MP3 player). If Canada opens its borders to trade with China at world prices for the two goods ($300 per 1,000 board-feet of lumber and $100 per MP3 player), what trade pattern develops for Canada? A) Canada will import lumber and MP3 players B) Canada will import lumber and export MP3 players C) Canada will export lumber and import MP3 players D) Canada import lumber and MP3 players

c

8) Gasoline and bicycles are complements in consumption. Suppose we increase the federal gasoline tax to $1 per gallon. Initially, the gasoline price rises due to the tax, and the demand curve for bicycles shifts rightward because these goods are complements. Then, the bicycle price rises, and the demand curve for gasoline shifts rightward. Assuming the general equilibrium is achieved in both markets after these two steps, which of the following statements is NOT true? A) Partial equilibrium analysis only focuses in the first-round changes in the gasoline market (ignoring the secondary effects that arise from changes in the bicycle market). B) Partial equilibrium analysis would predict a larger shift in the price and quantity demanded for gasoline than a general equilibrium analysis. C) The price increase in gasoline is larger under the general equilibrium approach, but the change in the quantity of gasoline demanded is smaller than under partial equilibrium analysis. D) All of these statements are true.

c

18) To be certain that exchange between people is mutually beneficial, we generally assume A) not all people are free to enter the market at will, but once in they are free to make any offer to trade. B) all people have complete information about each otherʹs preferences. C) there are no transaction costs. D) both B and C E) both A and B

d

5) Which of the following is true? Partial equilibrium analysis will A) overstate the impact of a tax for both substitutes and complements. B) understate the impact of a tax for both substitutes and complements. C) understate the impact of a tax for complements and overstate the impact for substitutes. D) understate the impact of a tax for substitutes and overstate the impact for complements.

d

52) The main point of the second theorem of welfare economics is that: A) efficiency is more important than equity. B) efficiency may be achieved, but equity is not a feasible goal. C) any attempt to achieve an equitable outcome must occur off the contract curve. D) any equitable outcome can be achieved by reallocating the resources among the members of a society.

d

55) In an economy which produces two goods X and Y, using two inputs L and K, efficient input use occurs when A) MRTSLKX = MRSLKY B) MRTXY = MRSXY C) MRSX/PX = MRSY/PY D) MRTSLKX = MRTSLKY

d

56) Which of the following is a condition for efficiency in the output market? A) MRT = MPL/MPK B) The marginal rate of substitution is the same for all customers. C) The marginal rate of technical substitution must be the same for all producers. D) The marginal rate of transformation must equal the marginal rate of substitution.

d

59) What does the negative slope of the production possibilities frontier imply? A) Diminishing marginal utility. B) The only way to increase one personʹs utility is to decrease the otherʹs. C) Diminishing marginal rates of technical substitution. D) The only way to increase output of one good is to decrease output of another.

d

66) The condition that requires MRTS for each input pair to equal the ratio of their marginal costs is known as __________ efficiency, and the condition that requires MRS for each output pair to equal their output price ratio is known as __________ efficiency. A) economic, market B) micro, macro C) cost, revenue D) technical, output

d

17) Which of the following is true at the exchange equilibrium between two individuals? A) Their marginal rates of substitution are equal. B) The slopes of the individualsʹ indifference curves are equal. C) Both individualsʹ marginal rates of substitution are equal to the ratio of the prices of the goods. D) A and B only E) A, B, and C are all true.

e