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Questions and Answers
In a General Equilibrium market, which condition states that firms combine inputs to produce a given output as inexpensively as possible?
In a General Equilibrium market, which condition states that firms combine inputs to produce a given output as inexpensively as possible?
Which view of equity focuses on maximizing the total utility of all members of society?
Which view of equity focuses on maximizing the total utility of all members of society?
Within a Competitive Equilibrium in an Exchange Economy, if the price of labor (wage rate) increases, what is the likely impact on the demand for goods X and Y?
Within a Competitive Equilibrium in an Exchange Economy, if the price of labor (wage rate) increases, what is the likely impact on the demand for goods X and Y?
Which of the following is a key aspect of Efficiency in Production related to firms using inputs to produce output as cheaply as possible?
Which of the following is a key aspect of Efficiency in Production related to firms using inputs to produce output as cheaply as possible?
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Considering the Factors Exchange in the Production model, what happens if the rental rate for capital (r) increases?
Considering the Factors Exchange in the Production model, what happens if the rental rate for capital (r) increases?
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Which view of equity seeks to achieve maximum utility for the least well-off person in society?
Which view of equity seeks to achieve maximum utility for the least well-off person in society?
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What does the Social Welfare Function measure?
What does the Social Welfare Function measure?
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Which criterion states that the Social Optimum can only be achieved in allocations on the Contract Curve?
Which criterion states that the Social Optimum can only be achieved in allocations on the Contract Curve?
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What does the Edgeworth box allow to determine?
What does the Edgeworth box allow to determine?
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What characteristic makes point H inefficient on the Utility Possibilities Frontier?
What characteristic makes point H inefficient on the Utility Possibilities Frontier?
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In a Competitive Equilibrium, what varies along the Contract Curve?
In a Competitive Equilibrium, what varies along the Contract Curve?
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What does each Social Welfare function correspond to?
What does each Social Welfare function correspond to?
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In a perfectly competitive market in general equilibrium, how are resources distributed?
In a perfectly competitive market in general equilibrium, how are resources distributed?
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What happens if the quantity offered in a market differs from the quantity demanded?
What happens if the quantity offered in a market differs from the quantity demanded?
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What is the outcome if consumers maximize their utility in a competitive market?
What is the outcome if consumers maximize their utility in a competitive market?
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According to the First Welfare Theorem, what will be completed if everyone trades in the competitive marketplace?
According to the First Welfare Theorem, what will be completed if everyone trades in the competitive marketplace?
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What does the First Welfare Theorem state about the fairness of resource allocation?
What does the First Welfare Theorem state about the fairness of resource allocation?
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From the consumer's perspective in a competitive equilibrium, why are indifference curves tangent?
From the consumer's perspective in a competitive equilibrium, why are indifference curves tangent?
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Study Notes
Competitive Equilibrium and Welfare
- A choice among resource allocations in the contract curve involves a decision about the different individuals’ level of utility.
- The Edgeworth box is used to set a criterion for achieving Social Optimum, which can only be achieved in allocations that are on the Contract Curve.
- Individuals' levels of utility vary along the Contract Curve.
Utility Possibilities Frontier Curve
- The curve shows all efficient allocations of resources measured in terms of the utility levels of two individuals.
- Points on the curve (E, F, and G) represent efficient outcomes, while Point H is inefficient.
Equity and Social Welfare Functions
- A Social Welfare Function measures the well-being of society as a whole in terms of individual utilities.
- Four views of equity:
- Egalitarian: equal distribution of goods.
- Rawlsian: maximizing the utility of the least well-off person.
- Utilitarian: maximizing total utility of all members of society.
- Market-oriented: market outcome is the most equitable.
General Equilibrium: Production
- Two factors of production: K (capital) and L (labor).
- Two goods: X and Y.
- Two consumers: A and B, who are owners of the factors of production.
- Individuals obtain rental rates for capital (r) and wage rates for labor (w).
Efficiency in Production
- Technical efficiency: combining inputs to produce a given output as inexpensively as possible.
- Prices adjust until the quantity supplied equals the quantity demanded.
Competitive Equilibrium or Walrasian Equilibrium
- Prices adjust until the quantity offered equals the quantity demanded.
The Economic Efficiency of Competitive Markets
- First Welfare Theorem: competitive markets distribute resources in a Pareto-efficient way.
- With exchange efficiency, consumers maximize their utility, achieving exchange efficiency without market intervention.
First Theorem of Welfare Economics
- In a competitive equilibrium:
- Consumers maximize their utility, taking prices as given.
- All marginal rates of substitution between consumers are equal.
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Description
Explore the concepts of competitive equilibrium, welfare, production, and social welfare in economics. Understand how choices among resource allocations on the contract curve impact individuals' utility levels.
