Econ Quiz 5 Ch 5

Great economists: Vilfredo Pareto

Pareto's law: 80-20 rule, the richest 20% of a population typically holds 80% of the wealth

Question 5.6 Figure 5.7a shows Angela and Bruno's feasible frontier, Angela's biological survival constraint and her reservation indifference curve. B is the outcome under coercion, while D is the outcome under voluntary exchange when Bruno makes a take-it-or-leave-it offer. Looking at this graph, we can conclude that: a. With a take-it-or-leave-it offer, Bruno's economic rent is equal to the joint surplus. b. Both Bruno and Angela are better off under voluntary exchange than under coercion. c. When Bruno makes a take-it-or-leave-it offer, Angela accepts because she receives an economic rent. d. Angela works longer under voluntary exchange than under coercion.

answer: a Bruno's reservation option is to receive nothing. Under voluntary exchange, Bruno receives the whole of the surplus: the amount in excess of what Angela needs to either survive or be willing to work. So this is his economic rent.

Question 5.1 Which of the following statements about the outcome of an economic interaction is correct? a. If the allocation is Pareto efficient, then you cannot make anyone better off without making someone else worse off. b. All participants are happy with what they get if the allocation is Pareto efficient. c. There cannot be more than one Pareto-efficient outcome. d. According to the Pareto criterion, a Pareto-efficient outcome is always better than an inefficient one.

answer: a If the allocation is Pareto efficient, there is no allocation that Pareto dominates it: that is, no allocation where someone is better off without others being worse off.

Question 5.2 Figure 5.3 shows Angela and Bruno's combined feasible set, and four allocations that might result from an interaction between them. From the figure, we can conclude that: a. If Angela has very flat indifference curves, she may prefer G to the other three allocations. b. If Angela has very steep indifference curves, she may prefer F to the other three allocations. c. Allocation G is the best of the four for Bruno. d. It is possible that Angela is indifferent between G and E.

answer: a & d Angela's indifference curves are downward-sloping. If the indifference curve through G was sufficiently flat, the other three points would all lie below it. Angela could be indifferent between G and E—one of her indifference curves could pass through both points.

Question 5.9 In Figure 5.10, Angela and Bruno are at allocation F, where she receives 3 bushels of grain for 4 hours of work. From the figure, we can conclude that: a. All the points on EF are Pareto efficient. b. Any point in the area between G, H and F would be a Pareto improvement. c. Any point between G and D would be a Pareto improvement. d. They would both be indifferent between all points on GH.

answer: b In area GHF, Angela is on a higher indifference curve than IC2, and Bruno has more grain than EF, so both are better off.

Question 5.7 Figure 5.8 shows the Pareto efficiency curve CD for the interaction between Angela and Bruno. Which of the following statements is correct? a. The allocation at C Pareto dominates the one at D. b. Angela's marginal rate of substitution is equal to the marginal rate of transformation at all points on the Pareto efficiency curve. c. The mid-point of CD is the most Pareto-efficient allocation. d. Angela and Bruno are indifferent between all the points on CD, because they are all Pareto efficient.

answer: b The Pareto efficiency curve, by definition, joins all the economically feasible points where MRS = MRT.

Question 5.4 Figure 5.5 shows Angela and Bruno's feasible frontier, and Angela's biological survival constraint. If Bruno can impose the allocation: a. He will choose the technically feasible allocation where Angela produces the most grain. b. His preferred choice will be where the marginal rate of transformation (MRT) on the feasible frontier equals the marginal rate of substitution (MRS) on the biological survival constraint. c. He will not choose 8 hours of work, because the MRS between Angela's work hours and subsistence requirements exceeds the MRT between work hours and grain output. d. He will choose 13 hours of free time for Angela, and consume 10 bushels of grain.

answer: b The distance between the feasible frontier and Angela's survival constraint, and thus Bruno's share, is maximized where MRS = MRT.

Question 5.10 Figure 5.15 shows the Lorenz curve for market income in the Netherlands in 2010. Which of the following is true? a. If area A increases, income inequality falls. b. The Gini coefficient can be calculated as the proportion of area A to area A + B. c. Countries with lower Gini coefficients have less equal income distributions. d. The Gini coefficient takes the value 1 when everyone has the same income.

answer: b This method can be used when the population is large, as it is for a whole country such as the Netherlands.

Question 5.3 Figure 5.4 shows Angela and Bruno's feasible frontier, and Angela's biological survival constraint. Based on this figure, which of the following is correct? a. If Angela works 24 hours she can survive. b. There is a technically feasible allocation in which Angela does not work. c. A new technology that boosted grain production would result in a bigger technically feasible set. d. If Angela did not need so much grain to survive the technically feasible set would be smaller.

answer: c Technology that boosted grain production would increase the amount of grain that could be produced for any given number of working hours, shifting the feasible frontier up and thus expanding the technically feasible set.

Question 5.8 In Figure 5.9, D and F are the outcomes before and after the introduction of a new law that limits Angela's work time to four hours a day while requiring a minimum pay of 4.5 bushels. Based on this information, which of the following statements are correct? a. The change from D to F is a Pareto improvement. b. The new outcome F is Pareto efficient. c. Both Angela and Bruno receive economic rents at F. d. As a result of the new law, Bruno has less bargaining power.

answer: c & d At F, Angela is above her reservation indifference curve and is thus receiving an economic rent. Bruno's reservation option is to receive nothing, so the grain he receives at F is an economic rent for him. At D, Bruno obtained rent equal to CD, and Angela obtained no rent. At F his rent is much lower. The law has increased Angela's bargaining power and reduced Bruno's.

Question 5.5 Figure 5.6 shows Angela and Bruno's feasible frontier, Angela's biological survival constraint, and her reservation indifference curve. Based on this figure, which of the following is correct? a. The economically feasible set is the same as the technically feasible set. b. For any given number of hours of free time, the marginal rate of substitution on the reservation indifference curve is smaller than that on the biological survival constraint. c. Some points are economically feasible but not technically feasible. d. If the ration Angela gets from the government increases from 2 to 3 bushels of grain, her reservation indifference curve will be above her biological survival constraint whatever her working hours.

answer: d When the ration is 2 bushels, Angela's reservation option is Z = (24, 2). If it increases to 3 bushels, her reservation option is (24, 3), which is on a higher indifference curve that lies above the survival constraint at all points. This will now be her reservation indifference curve.