ECON 100B - General Equilibrium and Efficiency

Suppose gold​ (G) and silver​ (S) are substitutes for each other because both serve as hedges against inflation. Suppose also that the supplies of both are fixed in the short run ​(QG=90 and QS=300​) and that the demands for gold and silver are given by the following​ equations: PG=975−QG+0.50PS and PS=630−QS+0.50PG. Qa. What are the equilibrium prices of gold and​ silver? Qb. What if a new discovery of gold doubles the quantity supplied to 180​? How will this discovery affect the prices of both gold and​ silver?

a. Price of Gold = $1400, Price of Silver = $1030 b. Price of Fold = $1280, Price of Silver = $970

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. MRTSLK = MRSXY for all producers and consumers.

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. A discussion of factors within the wheat market that influence wheat prices

Use the following statements to answer this question. I. Output efficiency requires that goods are produced in combinations that match people's willingness to pay for the goods. II. Output efficiency requires that goods are produced at costs that match people's willingness to pay for the goods. A. Both I and II are true. C. I is true, and II is false. B. I is false, and II is true. D. Both I and II are false.

A. Both I and II are true.

Coffee and donuts are complements in consumption. Suppose bad weather in the coffee producing regions of the world, which shifts the coffee supply curve leftward. How do the general equilibrium price and quantity outcomes compare to the partial equilibrium outcomes for this situation? A. General equilibrium price and quantity are higher. B. General equilibrium price is higher and quantity is lower. C. General equilibrium price is lower and quantity is higher. D. General equilibrium price and quantity are lower.

A. General equilibrium price and quantity are higher.

A competitive economy has many​ consumers, many​ producers, two goods​ (A and​ B) and two inputs​ (L and​ K). Which of the following is not one of the conditions for a competitive general equilibrium in this​ economy? A. PA=PB and MCA=MCB. B. PA=MCA and PB=MCB. C. MRSAB=PAPB for all consumers. D. MRTSALK = MRTSBLK. E. MRTAB=MCAMCB for all producers.

A. PA=PB and MCA=MCB.

Goods 1 and 2 are complements. When the supply of good 1​ increases, which of the following will occur after all feedback effects have worked themselves out in a general equilibrium​ analysis? A. The price of good 1 will​ decrease, the demand for good 2 will increase​, the price of good 2 will increase​, and the demand for good 1 will decrease. B. The price of good 1 will​ increase, the demand for good 2 will increase​, the price of good 2 will increase​, and the demand for good 1 will increase. C. The price of good 1 will​ increase, the demand for good 2 will decrease​, the price of good 2 will decrease​, and the demand for good 1 will increase. D. The price of good 1 will​ decrease, the demand for good 2 will decrease​, the price of good 2 will decrease​, and the demand for good 1 will decrease.

A. The price of good 1 will​ decrease, the demand for good 2 will increase​, the price of good 2 will increase​, and the demand for good 1 will decrease.

How is the production possibilities frontier related to the production contract​ curve? The production possibilities frontier shows A. the amount by which the quantity of one input can be reduced when one extra unit of another input is used so that output remains constant for points on the production contract curve. B. the quantities of two goods produced by points on the production contract curve. C. which points on the production contract curve are feasible and efficient. D. the average total cost of producing combinations of two goods along the production contract curve. E. which points on the production contract curve are feasible.

B. the quantities of two goods produced by points on the production contract curve.

n the Edgeworth production box​ diagram, what conditions must hold for an allocation to be on the production contract​ curve? For an allocation to be on the production contract​ curve, A. the marginal rate of technical substitution must be equal to the slope of a​ firm's isoquant curve. B. the quantity of one output cannot be increased without decreasing the quantity of another output. C. the marginal rate of technical substitution must be equal to one. D. the allocation must be feasible. E. the ratio of input marginal products must be greater than the ratio of input prices.

B. the quantity of one output cannot be increased without decreasing the quantity of another output.

Market power may prevent competitive markets from operating efficiently because A. unions may provide labor where unemployment is minimized. B. unions may provide labor where the wage is greater than marginal cost. C. unions may provide labor where employment is maximized. D. monopolies may provide output where price is equal to marginal revenue. E. monopolies may provide output where marginal revenue is greater than marginal cost.

B. unions may provide labor where the wage is greater than marginal cost.

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. All allocations are efficient.

​________ reflects household willingness to pay and​ ________ reflects the opportunity cost of the resources needed to produce a good. A. Price; average total cost B. Demand; price C. Price; marginal cost D. Marginal​ utility; price

C. Price; marginal cost

When there are many producers and many consumers in an​ economy, the best way to achieve an efficient allocation of resources is to have a A. centralized system in which the government owns all productive resources and allocates all goods and services to consumers. B. single planner who makes all production decisions and allocates all goods and services to consumers. C. freely operating economy in which all markets are perfectly competitive. D. freely operating economy with some very large firms that make most production and pricing decisions.

C. freely operating economy in which all markets are perfectly competitive.

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. one individual better off and the other individual worse off.

Public goods may prevent competitive markets from operating efficiently because A. the government does not necessarily supply sufficient quantities of ​nonrival, nonexclusive goods. B. the market does not necessarily supply sufficient quantities of goods with incomplete information. C. the market does not necessarily supply sufficient quantities of​ nonexclusive, nonrival goods. D. the market does not necessarily supply sufficient quantities of​ exclusive, rival goods. E. the market may supply too much of profitable goods.

C. the market does not necessarily supply sufficient quantities of​ nonexclusive, nonrival goods.

Coffee and donuts are complements in consumption. Suppose the economy expands so that consumer income increases, and coffee is a normal good. What impact does this change in the coffee market have on the donut market under a general equilibrium analysis? A. Donut demand shifts rightward and donut price and quantity increase. B. Donut demand shifts rightward, donut price increases, and donut quantity declines. C. Donut demand shifts leftward, donut price declines, and donut quantity increases. D. Donut demand shifts leftward and donut price and quantity decline.

D. Donut demand shifts leftward and donut price and quantity decline.

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. The marginal rate of transformation must equal the marginal rate of substitution.

The effects of decreased taxes on airline tickets on travel to major tourist destinations such as Florida and California and on the hotel rooms in those destinations. A decrease in taxes on airline tickets​ (paid by​ consumers) will A. increase the supply for airline​ tickets, increasing the demand for hotel​ rooms, a​ complement, increasing hotel room​ prices, which will then decrease the demand for airline​ tickets, lowering airline ticket prices. B. increase the demand for airline​ tickets, increasing the demand for hotel​ rooms, a​ substitute, increasing hotel room​ prices, which will then decrease the demand for airline​ tickets, lowering airline ticket prices. C. increase the demand for airline​ tickets, decreasing the demand for hotel​ rooms, a​ substitute, decreasing hotel room​ prices, which will then decrease the demand for airline​ tickets, lowering airline ticket prices. D. increase the demand for airline​ tickets, increasing the demand for hotel​ rooms, a​ complement, increasing hotel room​ prices, which will then decrease the demand for airline​ tickets, lowering airline ticket prices. E. increase the demand for airline​ tickets, increasing the demand for hotel​ rooms, a​ complement, increasing hotel room​ prices, which will then increase the demand for airline​ tickets, raising airline ticket prices.

D. increase the demand for airline​ tickets, increasing the demand for hotel​ rooms, a​ complement, increasing hotel room​ prices, which will then decrease the demand for airline​ tickets, lowering airline ticket prices.

Incomplete information may prevent competitive markets from operating efficiently because A. consumers who lack information may not buy products that would leave them worse off. B. consumers and producers have the same information. C. consumers who lack information may buy products that would leave them better off. D. producers who lack information may produce too much of some products and too little of others. E. consumers and producers have too much information.

D. producers who lack information may produce too much of some products and too little of others.

Externalities may prevent competitive markets from operating efficiently because A. producers may sell goods outside of the market. B. consumers may buy goods in the black market. C. market prices may reflect the activities of consumers or producers on others. D. the market may undersupply goods that generate positive externalities on others. E. the market may undersupply goods that generate negative externalities on others.

D. the market may undersupply goods that generate positive externalities on others.

What are the four major sources of market​ failure? Explain briefly why each prevents the competitive market from operating efficiently. The four major sources of market failure are A. surpluses​, shortages​, complete​ information, and externalities. B. market​ power, the​ government, externalities, and private goods. C. competition, symmetric​ information, externalities, and public goods. D. market​ power, incomplete​ information, excess supply​, and excess demand. E. market​ power, incomplete​ information, externalities, and public goods.

E. market​ power, incomplete​ information, externalities, and public goods.

Using general equilibrium​ analysis, and taking into account feedback​ effects, analyze the​ following: The likely effects of outbreaks of disease on chicken farms on the markets for chicken and pork. The outbreak of disease on chicken farms will A.decrease the supply of​ chickens, raising the price of​ chicken, which will decrease the demand for​ pork, a​ complement, which will then increase the demand for​ chicken, further raising chicken prices. B.decrease the supply of​ chickens, raising the price of​ chicken, which will increase the demand for​ pork, a​ complement, which will then increase the demand for​ chicken, further raising chicken prices. C.decrease the supply of​ chickens, raising the price of​ chicken, which will increase the demand for​ pork, a​ substitute, which will then decrease the demand for​ chicken, lowering chicken prices. D.increase the demand for​ chickens, raising the price of​ chicken, which will increase the demand for​ pork, a​ substitute, which will then increase the demand for​ chicken, further raising the price of chicken. E.decrease the supply of​ chickens, raising the price of​ chicken, which will increase the demand for​ pork, a​ substitute, which will then increase the demand for​ chicken, further raising chicken prices.

E.decrease the supply of​ chickens, raising the price of​ chicken, which will increase the demand for​ pork, a​ substitute, which will then increase the demand for​ chicken, further raising chicken prices.

Why can feedback effects make a general equilibrium analysis substantially different from a partial equilibrium​ analysis? Feedback effects can make a general equilibrium analysis different from a partial equilibrium analysis because in general equilibrium analysis A. equilibrium prices and quantities in all markets are determined simultaneously. B. price and quantity adjustments in one market are independent of adjustments in related markets. C. the impact of a​ market's price or quantity adjustments is overstated in markets for substitutes. D. the impact of a​ market's price or quantity adjustments is understated in markets for complements. E. the​ well-being of society as a whole in terms of the utilities of individual members is measured.

A. equilibrium prices and quantities in all markets are determined simultaneously.

Why is a competitive equilibrium on the contract​ curve? A competitive equilibrium is on the contract curve because at the competitive equilibrium A. every​ firm's marginal rate of technincal substitution equals the ratio of input prices. B. every​ firm's marginal rate of technical substitution is greater than every​ consumer's marginal rate of substitution. C. the marginal rate of transformation between outputs is less than every​ consumer's marginal rate of substitution. D. firms increase their output to the point where the output price is greater than the​ output's marginal cost. E. output prices are equal to one another.

A. every​ firm's marginal rate of technincal substitution equals the ratio of input prices.

In the analysis of exchange using the Edgeworth box​ diagram, explain why both​ consumers' marginal rates of substitution are equal at every point on the contract curve. The contract curve shows all allocations that are A. efficient, which are those that represent trades from bundles where the indifference curves of two consumers are tangent. B. efficient, which are those where no one can be made better off unless someone else is made worse off. C. attainable, which are those where the indifference curves of two consumers are tangent. D. efficient, which are those that make both consumers better off than they were at their initial endowments. E. feasible, which are those where no one can be made better off unless someone else is made worse off.

B. efficient, which are those where no one can be made better off unless someone else is made worse off.

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. efficient.