18 Questions
In a General Equilibrium market, which condition states that firms combine inputs to produce a given output as inexpensively as possible?
Technical efficiency
Which view of equity focuses on maximizing the total utility of all members of society?
Utilitarian
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?
Decrease for both goods
Which of the following is a key aspect of Efficiency in Production related to firms using inputs to produce output as cheaply as possible?
Productive efficiency
Considering the Factors Exchange in the Production model, what happens if the rental rate for capital (r) increases?
Decrease in capital demand
Which view of equity seeks to achieve maximum utility for the least well-off person in society?
Rawlsian
What does the Social Welfare Function measure?
The well-being of society as a whole in terms of individual utilities
Which criterion states that the Social Optimum can only be achieved in allocations on the Contract Curve?
Utility Possibilities Frontier
What does the Edgeworth box allow to determine?
Resources allocation on the Contract Curve
What characteristic makes point H inefficient on the Utility Possibilities Frontier?
It lies within the shaded area
In a Competitive Equilibrium, what varies along the Contract Curve?
Individual utility levels
What does each Social Welfare function correspond to?
Equity views
In a perfectly competitive market in general equilibrium, how are resources distributed?
In a Pareto-efficient way
What happens if the quantity offered in a market differs from the quantity demanded?
Relative prices adjust until equalized
What is the outcome if consumers maximize their utility in a competitive market?
Achieve exchange efficiency without intervention
According to the First Welfare Theorem, what will be completed if everyone trades in the competitive marketplace?
All mutually beneficial trades
What does the First Welfare Theorem state about the fairness of resource allocation?
It doesn't address fairness in resource allocation
From the consumer's perspective in a competitive equilibrium, why are indifference curves tangent?
To equalize all marginal rates of substitution between consumers
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.
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.
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