Unit 3: General Equilibrium and Welfare ECON6031 Quiz
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Questions and Answers

What is the primary issue with the production of goods like pest control and national defense?

  • They are not affected by the free-rider problem
  • They are under-produced by the free market due to the free-rider problem (correct)
  • They are over-produced by the free market
  • They are only produced by the government

    • What is a characteristic of Pareto efficiency?

  • It leads to the under-production of public goods
  • It ensures fairness in the distribution of wealth
  • It is only achieved through government intervention
  • It ensures that no one can be made better off without making someone else worse off (correct)

    • What is a potential issue with attempts to improve distributional fairness?

  • They always lead to desirable outcomes
  • They have met with mixed success and had many undesirable side-effects (correct)
  • They are only relevant in less developed countries
  • They are unnecessary in a Pareto efficient economy

    • What is represented by point A in the diagram?

    <p>The initial endowments of Smith and Jones</p> Signup and view all the answers

    What is a characteristic of a Pareto efficient economy?

    <p>A few individuals are wealthy and wasteful, while others freeze and starve</p> Signup and view all the answers

    What is true about Smith and Jones at point A?

    <p>Smith is poor and Jones is rich</p> Signup and view all the answers

    What is a result of the free-rider problem?

    <p>Under-production of public goods</p> Signup and view all the answers

    What is true about the distribution of benefits in the economy?

    <p>It may be regarded as unfair</p> Signup and view all the answers

    What is an example of a public good?

    <p>National defense</p> Signup and view all the answers

    In a general equilibrium, firms and consumers choosing the same px/py ratio leads to excess demand for both goods.

    <p>False</p> Signup and view all the answers

    The ratio of marginal utilities (MUx/MUy) is always equal to the ratio of marginal costs (MCx/MCy) in a general equilibrium.

    <p>True</p> Signup and view all the answers

    At point D in an Edgeworth Box, the marginal rate of substitution (MRS) and the marginal rate of transformation (RPT) are not equal.

    <p>False</p> Signup and view all the answers

    If px/py existed, firms would choose one point, and consumers would choose another, resulting in excess demand for one good and excess supply of another.

    <p>True</p> Signup and view all the answers

    MRS = RPT = px/py does not represent an equilibrium condition for a two-good, two-input economy.

    <p>False</p> Signup and view all the answers

    General equilibrium analysis is not applicable to economies with many goods, as it only works for two-good, two-input economies.

    <p>False</p> Signup and view all the answers

    In a general equilibrium, markets clear through changes in supply and demand, not through changes in prices.

    <p>False</p> Signup and view all the answers

    General equilibrium models assume that producers and consumers have different px/py ratios, leading to two separate analyses.

    <p>False</p> Signup and view all the answers

    A general equilibrium is established at a point where the marginal rate of substitution is not equal to the marginal rate of transformation.

    <p>False</p> Signup and view all the answers

    The marginal rate of transformation (RPT) changes with each point in the production possibility frontier (PPF) due to the opportunity cost.

    <p>True</p> Signup and view all the answers

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