Lesson test: General equilibrium and the limits of the model

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General equilibrium and the limits of the model

1.[2p]
What characterises a Pareto efficient allocation in an exchange economy?

The two consumers' marginal rates of substitution are equal, so no mutually improving trade remains

Correct

Both consumers hold equal quantities of each good

The answer is: The two consumers' marginal rates of substitution are equal, so no mutually improving trade remains

Both consumers reach the same level of utility

The answer is: The two consumers' marginal rates of substitution are equal, so no mutually improving trade remains

Each consumer holds their original endowment

The answer is: The two consumers' marginal rates of substitution are equal, so no mutually improving trade remains

2.[3p]
A holds 90 units of $x$ and 10 of $y$ ; B holds 30 of $x$ and 50 of $y$ . Both have $u = \sqrt{x y}$ . With the price of $y$ set to 1, what is the equilibrium price of $x$ ?

CorrectNot quite: 0.5

3.[3p]
For that equilibrium, how many units of $x$ does A end up with?

CorrectNot quite: 55

4.[2p]
An allocation giving one person everything is Pareto efficient.

True

Correct

False

The answer is: True

5.[3p]
Which assumptions does the First Welfare Theorem require?

Select all that apply

All agents are price takers

Correct

There are no externalities

Correct

Information is complete

Correct

All agents have identical preferences

The answer is: All agents are price takers, There are no externalities, Information is complete

6.[3p]
What does the Second Welfare Theorem say?

Any Pareto efficient allocation can be reached as a competitive equilibrium after a suitable lump-sum redistribution

Correct

Competitive markets always produce a fair distribution

The answer is: Any Pareto efficient allocation can be reached as a competitive equilibrium after a suitable lump-sum redistribution

Redistribution always reduces efficiency

The answer is: Any Pareto efficient allocation can be reached as a competitive equilibrium after a suitable lump-sum redistribution

Every efficient allocation gives everyone the same utility

The answer is: Any Pareto efficient allocation can be reached as a competitive equilibrium after a suitable lump-sum redistribution

7.[3p]
Why is the Second Welfare Theorem of limited practical use?

Genuinely lump-sum transfers would have to depend on characteristics nobody can change, which are unobservable

Correct

Competitive equilibria rarely exist in practice

The answer is: Genuinely lump-sum transfers would have to depend on characteristics nobody can change, which are unobservable

Pareto efficient allocations are not unique

The answer is: Genuinely lump-sum transfers would have to depend on characteristics nobody can change, which are unobservable

Convex preferences are rare

The answer is: Genuinely lump-sum transfers would have to depend on characteristics nobody can change, which are unobservable

8.[3p]
What does the theory of the second best establish?

With one uncorrectable distortion, satisfying the remaining competitive conditions need not be an improvement

Correct

A second-best outcome is always close to the first-best one

The answer is: With one uncorrectable distortion, satisfying the remaining competitive conditions need not be an improvement

Distortions always cancel each other out

The answer is: With one uncorrectable distortion, satisfying the remaining competitive conditions need not be an improvement

Competitive markets are second best to central planning

The answer is: With one uncorrectable distortion, satisfying the remaining competitive conditions need not be an improvement

9.[3p]
Match each finding to what it challenges.

The Allais paradox
Preference reversals
The endowment effect
Sonnenschein and Mantel

the independence axiom
reference-independent valuation
uniqueness and stability
a single underlying ranking

Show the answer

The Allais paradox: the independence axiom Preference reversals: a single underlying ranking The endowment effect: reference-independent valuation Sonnenschein and Mantel: uniqueness and stability

1.[2p] What characterises a Pareto efficient allocation in an exchange economy?

2.[3p] A holds 90 units of x and 10 of y; B holds 30 of x and 50 of y. Both have u=xy. With the price of y set to 1, what is the equilibrium price of x?

3.[3p] For that equilibrium, how many units of x does A end up with?

4.[2p] An allocation giving one person everything is Pareto efficient.

5.[3p] Which assumptions does the First Welfare Theorem require?

6.[3p] What does the Second Welfare Theorem say?

7.[3p] Why is the Second Welfare Theorem of limited practical use?

8.[3p] What does the theory of the second best establish?

9.[3p] Match each finding to what it challenges.

1.[2p]
What characterises a Pareto efficient allocation in an exchange economy?

2.[3p]
A holds 90 units of $x$ and 10 of $y$ ; B holds 30 of $x$ and 50 of $y$ . Both have $u = \sqrt{x y}$ . With the price of $y$ set to 1, what is the equilibrium price of $x$ ?

3.[3p]
For that equilibrium, how many units of $x$ does A end up with?

4.[2p]
An allocation giving one person everything is Pareto efficient.

5.[3p]
Which assumptions does the First Welfare Theorem require?

6.[3p]
What does the Second Welfare Theorem say?

7.[3p]
Why is the Second Welfare Theorem of limited practical use?

8.[3p]
What does the theory of the second best establish?

9.[3p]
Match each finding to what it challenges.