General Equilibrium Analysis and Economic | Exam Prep Ch.19 - Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key by Edgar K. Browning, Mark A. Zupan. DOCX document preview.
Package: Test Bank
Title: Microeconomics: Theory and Application, 13e
Chapter Number: 19
Question Type: Multiple Choice
1. Partial equilibrium analysis:
a. is useful for analyzing markets when changes are concentrated in one market and repercussions are almost nonexistent.
b. is useful for analyzing markets when changes occur throughout all markets equally but the impact on price and quantity varies across markets.
c. is useful for analyzing markets when changes occur in one market but repercussions are experienced largely in another market.
d. is useful for analyzing markets when a change initiated by a government policy affects most of the markets in the economy.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
2. Which of the following is true of general equilibrium analysis?
a. It is useful for analyzing markets when changes are initiated in one market and repercussions are almost nonexistent.
b. It considers the impact of a change in government policy on a market in isolation.
c. It is useful for analyzing markets when changes are initiated in one market but they affect prices and output in other markets.
d. It is useful for analyzing market conditions when there is no mutual interdependence among markets.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
3. General equilibrium analysis is the study of:
a. how equilibrium is determined in a monopolistically competitive market.
b. the determination of equilibrium in one factor market.
c. the determination of equilibrium in a product market.
d. how equilibrium is determined in all markets simultaneously.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
4. Partial equilibrium analysis tends to ignore:
a. the demand side of the product market.
b. the relevance of diminishing returns to a factor used in production.
c. the interrelationships among prices and markets.
d. the supply side of the product market.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
5. Assuming that Good X and Good Y are close substitutes of each other, a per-unit sales tax on Good Y will:
a. increase the demand for Good X.
b. increase the demand for Good Y.
c. decrease the supply of Good X.
d. decrease the demand for Good X.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
6. Partial equilibrium analysis is the study of:
a. how equilibrium is determined in more than one market simultaneously.
b. the determination of equilibrium in a market with incomplete information on price and output.
c. the determination of equilibrium in a given market, considering the influence of other markets.
d. how equilibrium is determined in a given market, independent of other markets.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
7. Which of the following is true of the general equilibrium analysis?
a. It assumes that a change initiated in a market does not affect prices in other markets.
b. It determines changes in equilibrium price in a market assuming that all other markets are in equilibrium.
c. The ceteris paribus assumption is crucial in determining changes in price and quantity in general equilibrium analysis.
d. It is useful in determining price and quantity of goods and services when the markets mutually interdependent.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
8. General equilibrium analysis is more appropriate than partial equilibrium analysis when:
a. all product markets are in equilibrium.
b. change in the price of one commodity does not affect the demand for other commodities.
c. a change in condition affects many markets at the same time and in similar magnitudes.
d. a change in condition affects primarily one market.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
9. In which of the following situations would it be most important to use the general equilibrium analysis?
a. The impact of a price floor on the demand for corn
b. The impact of a rent control on the supply of rental apartments in a city
c. An increase in the tariff on imported automobiles
d. An increase in the national sales tax imposed on all goods
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
10. Which of the following assumptions are made in a partial equilibrium analysis?
a. Positive spillover and feedback effects
b. Constant price level in all markets but one
c. Mutual interdependence among markets
d. Variable prices in each and every market
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
11. Which of the following can be considered as a feedback effect of an increase in the price of butter?
a. A decrease in the demand for margarine
b. An increase in the demand for margarine
c. An increase in the demand for butter
d. A decrease in the price of margarine
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
12. Assume that the price of steel rises because steel workers negotiate for higher wages. The impact of this increase in the price of steel on the market for aluminum is the result of the:
a. real income effect on aluminum.
b. disequilibrium effect on aluminum.
c. total price effect on aluminum.
d. spillover effect on aluminum.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
13. A per-unit tax imposed on a product in market A leads to an increase in its price. This causes some consumers to switch to another product in market B. This in turn drives up the price in market B. When the price in market B rises, it causes the demand for the product in market A to rise. The impact in market A is known as the:
a. income effect.
b. feedback effect.
c. equilibrium effect.
d. total price effect.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
14. A change in equilibrium in one market that affects other markets is called:
a. a multiplier effect.
b. an external effect.
c. a spillover effect.
d. a lagged exchange effect.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
15. An existing allocation of goods is said to be Pareto efficient:
a. if the distribution is equitable.
b. as long as any redistribution is a positive-sum game.
c. as long as any redistribution makes at least one person better off and no one else is worse off.
d. if any redistribution cannot make someone better without leaving someone else worse off.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
16. A Pareto optimal allocation of resources implies that:
a. only one person can be made better off through trade.
b. no person can be made better off through trade.
c. no person can be made better off through trade, without harming another person.
d. through any feasible change in resource allocation, it is possible to make someone better off without leaving someone else worse off.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
17. An allocation of resources is inefficient if, through some feasible change in the allocation of resources:
a. it is impossible to make someone better off without making someone else worse off.
b. it is impossible to make everyone better off.
c. it is possible to make someone better off without leaving someone else worse off.
d. it is possible to make everyone better off, provided the resources are distributed equally.
Learning Objective: Explain the concept of economic efficiency.
18. An efficient distribution of a certain quantity of goods between two parties is one in which:
a. neither party can be made better off by changing the allocation of the goods.
b. one party can be made better off at the expense of the other by changing the allocation of the goods.
c. both parties evenly divide the total quantities of the goods.
d. neither party can be made worse off if the allocation of the goods is altered.
Learning Objective: Explain the concept of economic efficiency.
19. In the figure given below, the curve TT shows how the allocation of a resource affects the well-being of two individuals, Hank and Monica.
TT is referred to as:
a. the welfare frontier.
b. the production possibility frontier.
c. the marginal rate of transformation curve.
d. the community indifference curve.
Learning Objective: Explain the concept of economic efficiency.
20. In the figure given below, the curve TT shows how the allocation of a resource affects the well-being of two individuals, Hank and Monica.
A movement from A to B would represent:
a. a movement from an efficient allocation of resources to an inefficient one.
b. an improvement of Monica's welfare.
c. a movement from an efficient to an inefficient resource allocation.
d. an improvement in Hank's well-being.
Learning Objective: Explain the concept of economic efficiency.
21. In the figure given below, the curve TT shows how the allocation of a resource affects the well-being of two individuals, Hank and Monica.
Which of the following would represent a movement from an inefficient allocation of resources to an efficient allocation of resources?
a. A movement from point E to point A
b. A movement from point C to point B
c. A movement from point B to point D
d. A movement from point A to point B
Learning Objective: Explain the concept of economic efficiency.
22. In the figure given below, the curve TT shows how the allocation of a resource affects the well-being of two individuals, Hank and Monica.
A move from C to D would:
a. be desirable because it produces a more equal distribution of resources.
b. be more desirable than a movement from C to B.
c. be desirable because a movement from an inefficient allocation of resources to an efficient allocation of resources is always preferred.
d. represent a movement from an inefficient allocation to an efficient allocation of resources.
Learning Objective: Explain the concept of economic efficiency.
23. In the figure given below, the curve TT shows how the allocation of a resource affects the well-being of two individuals, Hank and Monica.
The curve TT shows:
a. a single and unique distribution of resources that jointly maximizes Hank's and Monica's well-being.
b. all the efficient resource allocations that are attainable.
c. all the points where the marginal rates of substitution between goods are equal for both Hank and Monica.
d. all the points that maximize the individual well-being of Hank and Monica.
Learning Objective: Explain the concept of economic efficiency.
24. In the figure given below, the curve TT shows how the allocation of a resource affects the well-being of two individuals, Hank and Monica.
Point C:
a. represents the resource allocation where total welfare is minimized.
b. indicates an inefficient allocation of resources.
c. is Pareto optimal.
d. represents an efficient but undesirable allocation of resources.
Learning Objective: Explain the concept of economic efficiency.
25. In the figure given below, the curve TT shows how the allocation of a resource affects the well-being of two individuals, Hank and Monica.
Point F represents a resource allocation that is:
a. is feasible but undesirable from the society’s point of view.
b. inefficient.
c. desirable but not attainable.
d. both undesirable and unattainable.
Learning Objective: Explain the concept of economic efficiency.
26. Which of the following statements about the welfare frontier is incorrect?
a. Some of the points on the welfare frontier are efficient.
b. The welfare frontier is downward sloping.
c. Any point on the welfare frontier is preferred to any point inside it.
d. The marginal rate of substitution [MRS] is equal to the marginal rate of transformation [MRT] at all points on the welfare frontier.
Learning Objective: Explain the concept of economic efficiency.
27. Which of the following is true of the points along the welfare frontier?
a. Every point along the welfare frontier is efficient.
b. Every point along the welfare frontier shows a suboptimal allocation of resources.
c. Movements along the welfare frontier makes one person better off without harming anyone.
d. The amount of resources available is different at different points on the welfare frontier.
Learning Objective: Explain the concept of economic efficiency
28. In Figure 19-2 given below, points A, B, C, and D show the different allocations of goods between Ann and Bill.
Which of the following allocations of goods between Ann and Bill is inefficient?
a. A
b. B
c. C
d. D
Learning Objective: Explain the concept of economic efficiency.
29. A comparison between the resource allocation at different points on the welfare frontier is difficult because:
a. the shape of the welfare frontier is nonlinear.
b. some of the allocations on the frontier are inefficient, and some are efficient.
c. all the points on the welfare frontier are efficient.
d. interpersonal utility comparisons cannot be made objectively.
Learning Objective: Explain the concept of economic efficiency.
30. Two goods are said to be allocated efficiently between consumers when:
a. they are divided equally between them.
b. the marginal rates of substitution between the two goods are the same for both consumers.
c. further reallocations can make the consumers better off.
d. the consumers derive the maximum marginal utility from the consumption of both the goods.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
31. Assume that Jeff and Jane both consume only two goods: burgers and soft drinks. Jeff would be willing to trade three soft drinks for one more burger, while Jane is willing to trade only two soft drinks for one more burger. Under these conditions, if Jeff and Jane are going to trade, then:
a. Jeff should trade soft drinks for burgers.
b. Jeff should trade burgers for soft drinks.
c. a mutual trade between Jeff and Jane will make Jeff better off and Jane worse off.
d. a mutual trade between Jeff and Jane will make Jane better off and Jeff worse off.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
32. Assume that Bill and Terry consume two goods X and Y, so that their marginal rates of substitution are equal. Under these conditions we can conclude that:
a. any trade between Bill and Terry will be mutually beneficial.
b. any trade between Bill and Terry will be beneficial for Bill but not for Terry.
c. any trade between Bill and Terry will be beneficial for Terry but not for Bill.
d. there can be no mutually beneficial trade between Terry and Bill.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
33. Which of the following is not one of the three fundamental economic problems facing an economy?
a. How much of each good to produce?
b. How much of each input to use in producing each good?
c. How to employ technology in the most efficient way?
d. How to allocate goods and services among consumers?
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
34. If the marginal rate of substitution between two goods is not equal for Jack and Jill it means that:
a. both could be made better off with a different distribution of goods between them.
b. the efficient output mix is not being produced.
c. inputs are being allocated inefficiently.
d. the quantity supplied does not equal the quantity demanded.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
35. Which of the following is true of contract curves?
a. Every point on the contract curve indicates an inefficient distribution of goods among consumers.
b. At any point on the contract curve, all the consumers have equal marginal rates of substitution.
c. A movement along the contract curve indicates that, any trade that benefits one person will necessarily benefit the other.
d. At every point on the contract curve, the marginal utility derived from the consumption of a good is identical for all the consumers.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
36. An exchange of goods between two individuals, Frank and Linda, will be mutually beneficial:
a. when their marginal rates of substitution differ.
b. until they consume the same amount of each good.
c. as long as each one thinks he or she can benefit at the other's expense.
d. as long as they are on the contract curve.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
37. Any two goods are said to be efficiently distributed among the consumers if:
a. the ratio of the marginal utilities derived by each consumer from a certain amount of the two goods is equal to the ratio of their prices.
b. the real income of the consumers are equal.
c. every consumer consumes the same amount of the two goods.
d. the marginal rate of substitution between any two goods is equal across consumers.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
38. When the marginal rates of substitution differs across any two consumers, then:
a. mutually beneficial trade is possible between them.
b. the only way to make one consumer better off is to make the other worse off.
c. it is impossible to find a point that makes both worse off.
d. a mutual exchange between them will leave them worse off.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
39. When the allocation of two goods between two individuals is efficient:
a. the utilities of both the individuals from the consumption of these two goods are equal.
b. both individuals will derive the maximum utility from the consumption of these two goods.
c. the marginal rates of substitution between two goods for both the consumers are the same.
d. the market demand curves in all markets are identical.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
40. The _____ identifies the different distributions of goods across consumers that are efficient.
a. production possibility frontier
b. contract curve
c. indifference curve
d. offer curve
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
41. An Edgeworth production box:
a. identifies the most efficient method of producing the output.
b. identifies the maximum amount of an input required to produce a good.
c. identifies all the ways in which two inputs can be allocated between two industries in a simple economy.
d. identifies the different ways in which two goods can be allocated between two people in a simple economy.
Learning Objective: Examine efficiency in production and what this implies about input usage across different industries.
42. The length and height of an Edgeworth production box for any two industries:
a. have no economic meaning.
b. must always be equal.
c. indicate the amount of each input that is employed by the two industries.
d. indicate the amount of an input that is employed by any two industries.
Learning Objective: Examine efficiency in production and what this implies about input usage across different industries.
43. In an Edgeworth production box with isoquants, the contract curve reflects:
a. an efficient distribution of the output among consumers.
b. efficient input allocations across the firms.
c. all the points where competitive input markets could be in equilibrium.
d. all the points where the marginal rates of substitution between consumers are equal.
Learning Objective: Examine efficiency in production and what this implies about input usage across different industries.
44. In an Edgeworth production box diagram, if two isoquants intersect, it means that:
a. the well-being of the two consumers can be improved without changing the output of either good.
b. the marginal rate of substitution between consumers does not equal the marginal rate of technical substitution.
c. by allocating inputs differently between firms, output can be increased at no additional cost.
d. consumers are not facing the same output price ratio.
Learning Objective: Examine efficiency in production and what this implies about input usage across different industries.
45. A point off the contract curve in an Edgeworth production box means that:
a. the costs are being minimized.
b. the output is being maximized.
c. the economy is not operating on the production possibility frontier.
d. the firms must be facing the same ratio of input prices.
Learning Objective: Examine efficiency in production and what this implies about input usage across different industries.
46. A perfectly competitive economy generally results in an efficient distribution of products among consumers. This because competitive markets:
a. produce homogenous products.
b. establish a single price for all goods.
c. allow free entry and exit of firms.
d. are controlled by the government.
Learning Objective: Examine efficiency in production and what this implies about input usage across different industries.
47. A general competitive equilibrium:
a. must lie on the production contract curve.
b. requires the input prices to be equal to the respective marginal productivities.
c. can be attained only if the inputs are perfectly substitutable.
d. is attained at a point where two isoquants intersect each other.
Learning Objective: Examine efficiency in production and what this implies about input usage across different industries.
48. A general competitive equilibrium in input markets:
a. is attained at a point where the isoquants of the two goods intersect each other.
b. involves an allocation of inputs such that the ratio of the input prices equals the ratio of the marginal revenue of the firms.
c. is shown by an allocation of inputs that lies on the contract curve of an Edgeworth production box.
d. is essentially related to an inefficient allocation of inputs between the production of any two commodities.
Learning Objective: Examine efficiency in production and what this implies about input usage across different industries.
49. If an Edgeworth production box for two industries, with land and labor as the inputs, has a contract curve that is same as the diagonal of the box, we can infer that:
a. land is being substituted for labor in production of both the commodities.
b. the production possibility frontier is a 45-degree line from the origin.
c. both industries are increasing cost industries.
d. the proportion of land to labor used in producing the two goods is the same.
Learning Objective: Examine efficiency in production and what this implies about input usage across different industries.
50. The production possibility frontier [PPF] is derived by:
a. calculating the marginal rates of technical substitution from a contract curve.
b. plotting output combinations from a contract curve.
c. plotting input combinations from a contract curve.
d. plotting input combinations from the Edgeworth box.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
51. Every point _____ corresponds to a point on the production possibility frontier.
a. on the production contract curve
b. in an Edgeworth production box
c. of tangency between the indifference curves
d. on the welfare frontier
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
52. Which of the following is a true statement?
a. Every point along a contract curve in an Edgeworth production box indicates an equal distribution of all resources across all the firms.
b. Every point along a contract curve in an Edgeworth production box directly corresponds to a specific point on a production possibility frontier.
c. Every point along an isoquant defines a competitive equilibrium.
d. Every point along a production possibility frontier represents an efficient output mix.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
53. The PPF is concave to the origin because:
a. the marginal rate of transformation increases as we move down the PPF.
b. the marginal rate of technical substitution increases as we move up the PPF.
c. the marginal rate of technical substitution decreases as we move up the PPF.
d. the opportunity cost of producing a commodity decreases with increase in its production.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
54. The rate at which one product can be “transformed” into another is referred to as:
a. the marginal rate of technical substitution.
b. the marginal rate of substitution.
c. the efficient transformation rate.
d. the marginal rate of transformation.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
55. The slope of the PPF is equal to the:
a. marginal rate of technical substitution.
b. marginal rate of substitution.
c. marginal rate of transformation.
d. marginal propensity to consume.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
56. The marginal rate of transformation measures the:
a. absolute cost of producing a commodity.
b. relative price of labor.
c. opportunity cost of one good in terms of the other.
d. rate at which one input is substituted for the other.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
57. The marginal rate of transformation between wine and corn refers to:
a. the total units of wine that can be produced if nothing of corn is produced in the economy.
b. the ratio between the per-unit cost of producing wine to the per-unit cost of producing corn.
c. the opportunity cost of wine in terms of corn and vice versa.
d. the ratio between the market price of wine and the market price of corn.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
58. A point on the production possibility frontier and the contract curve in the Edgeworth production box both reflect:
a. identical marginal rates of substitution among consumers.
b. full employment of resources.
c. the efficient output mix.
d. the ratio of the input prices.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
59. Suppose an economy produces two goods, corn and wine. If the marginal rate of substitution between corn and wine for consumers is not equal to the marginal rate of transformation, it means that:
a. the quantity demanded does not equal the quantity supplied.
b. the economy is operating on the production possibility frontier.
c. both consumers could be made better off with a different distribution of the goods between them.
d. the output mix is not efficient.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
60. In a general competitive equilibrium, the slope of the production possibility frontier equals all of the following, except:
a. the ratio of the marginal costs of the goods.
b. the marginal rate of substitution for any consumer.
c. the ratio of the prices of the commodities.
d. the input ratio in the production of the commodities.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
61. Suppose wine production is capital intensive and corn production is labor intensive. An increase in the demand for wine will cause:
a. an increase in the marginal cost of corn relative to the marginal cost of wine.
b. an increase in the price of labor relative to the price of capital.
c. a decrease in the marginal cost of capital.
d. an increase in the price of capital relative to the price of labor.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
62. Suppose an economy produces two goods, corn and wine. The marginal rate of substitution between corn and wine for consumers is 1C/3W and the marginal rate transformation is 1C/1W. What can be said about the output mix?
a. The output mix is inefficient; more wine and less corn should be produced.
b. The output mix is inefficient; less of both the commodities should be produced.
c. The output mix is inefficient; more corn and less wine should be produced.
d. The output mix is efficient.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
63. The figure below illustrates the determination of an efficient output mix in a two good economy. The output combination is represented by point Z and the consumption point of a representative consumer is W. The slope of the line zz represents the marginal rate of transformation [MRT].
At point Z:
a. the MRTXY is greater than the MRSXY.
b. the opportunity cost of producing an additional unit of good X equals 2 units of good Y.
c. the resources in the economy are being used inefficiently.
d. the slope of the production possibility frontier is greater than the slope of the line zz.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
64. The figure below illustrates the determination of an efficient output mix in a two good economy. The output combination is represented by point Z and the consumption point of a representative consumer is W. The slope of the line zz represents the marginal rate of transformation [MRT].
Based on the information given in the figure, we can conclude that:
a. the allocation of inputs is inefficient.
b. the allocation of the given output among the two consumers is efficient.
c. the output mix between goods X and Y is inefficient.
d. a redistribution of the goods will make both the consumers worse off.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
65. The figure below illustrates the determination of an efficient output mix in a two good economy. The output combination is represented by point Z and the consumption point of a representative consumer is W. The slope of the line zz represents the marginal rate of transformation [MRT].
Suppose the marginal rate of substitution [MRS] at point W is 3Y/2X instead of 2Y/1X. Which of the following will be true?
a. The representative consumer’s MRS will be less than the MRT, which implies more Y and less X will make all consumers better off.
b. The economy will be producing an efficient output combination.
c. The representative consumer’s MRS 3Y/2X will be less than the MRT, which implies more X and less Y will make both consumers better off.
d. The allocation of the goods between the two individuals is efficient.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
66. The figure below illustrates the determination of an efficient output mix in a two good economy. The output combination is represented by point Z and the consumption point of a representative consumer is W. The slope of the line zz represents the marginal rate of transformation [MRT].
Identify the correct statement.
a. If the distribution of output at Z is given by point W, each consumer has the same MRS.
b. The consumption point W is a suboptimal consumption point
c. Compared to consumers' tastes, too less of good Y is being produced.
d. Given the tastes of the consumers, the distribution of the output at point Z must be changed for attaining Pareto optimality.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
67. Without trade the price of one unit of product Y is 1/3 that of one unit of X in a small country.
Products X and Y trade on the world market at equal prices. If the small country starts trading with the rest of the world:
a. the small country would import product Y.
b. the small country would export both product X and product Y.
c. the domestic price of product X would equal the world price.
d. the relative price of X and Y would not change in the small country.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
68. In the absence of trade between a small country and the rest of the world, product X costs 1/3 as much per-unit as does product Y in the small country. However, in the world market X and Y trade at equal prices. If trade were now made possible between the small country and the rest of the world:
a. the small country would adjust by importing X.
b. the small country would adjust by exporting X.
c. the small country would end up importing both Y and X from the rest of the world.
d. the rest of the world would not find it advantageous to trade with the small country.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
69. When economists say that free trade is beneficial for the nation as a whole, they mean that:
a. everyone in one country consumes more but everyone in the other country consumes less.
b. trade ensures that everyone consumes more.
c. trade makes it possible to consume beyond the production possibility frontier.
d. society consumes on a more preferred point on the same production possibility frontier.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
70. Which of the following is true of international trade?
a. International trade makes it possible to consume better quality goods at a high price.
b. International trade makes the domestic producers of import substitutes better off.
c. International trade makes it possible to consume outside of the production possibility frontier.
d. In the absence of international trade, a country always produces at a point below the production possibility frontier.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
71. Which of the following is not an equilibrium condition in a general equilibrium analysis of a competitive economy?
a. Input markets are in equilibrium.
b. The quantity supplied equals the quantity demanded.
c. Factor incomes are evenly divided.
d. The marginal rate of transformation equals the marginal rate of substitution.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
72. The three conditions for an efficient allocation of resources are fulfilled:
a. when the distribution of income is equal.
b. whenever all consumers have the same willingness to pay for a good.
c. if the product and input markets are competitive.
d. only at the midpoint of the welfare frontier.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
73. If the marginal rates of technical substitution between inputs are not equal among firms, it means that:
a. output is being inefficiently distributed.
b. the ratio of the input prices is greater than the ratio of the product prices.
c. output is not being maximized, given available inputs.
d. input markets are not in equilibrium.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
74. If perfect competition prevails in a two good (X and Y) and two input (L and K) economy, all of the following conditions are satisfied, except that:
a. the price of good X is equal to the price of good Y.
b. the marginal cost of producing good X is equal to the price of good X.
c. the marginal rate of substitution between X and Y is equal to the marginal rate of transformation.
d. the ratio of the marginal costs of the inputs is equal to the input price ratio.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
75. If the labor market is perfectly competitive:
a. the equilibrium wage will be equal to the minimum wage.
b. the rate of unemployment will be zero.
c. the wage rate will be the same in all the industries.
d. the demand for labor will be perfectly inelastic.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
76. In a competitive equilibrium, each producer produces at a point where:
a. the price of the good equals the marginal cost of producing the good.
b. the price of the good equals the wage rate.
c. the price is greater than the average revenue.
d. the wage rate is equal to the marginal revenue.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
77. If the marginal rates of technical substitution between two firms are not equal, then:
a. the society is not on the production possibility frontier.
b. the economy ends up producing on the contract curve of the economy’s Edgeworth production box.
c. goods are not allocated between consumers efficiently.
d. the isoquants of the firms do not intersect each other.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
78. A typical consumer consumes products X and Y. In competitive equilibrium, the price of X is three times the price of Y. If MCX is the marginal cost of producing X and MCY is the marginal cost of producing Y, this implies that:
a. MCX = MCY + 3
b. MCX + 3 = MCY.
c. MCX = (1/3) MCY.
d. MCX = 3MCY.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
79. Perfect competition in product and factor markets results in:
a. maximum utility from the consumption of goods for all consumers.
b. efficient production, distribution, and output level.
c. efficient decision-making by policymakers.
d. minimal voluntary exchange.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
80. Which of the following is not a necessary condition for economic efficiency in competitive markets?
a. The marginal rates of substitution of all goods across all consumers are equal.
b. The prices of productive inputs are the same across all productive uses.
c. The marginal rates of technical substitution are the same across all firms and industries.
d. The marginal rates of substitution of two goods across all consumers will equal the marginal rates of transformation of the two goods.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
81. According to critics, centrally planned economies fail to attain Pareto optimality because of:
a. the difference in the interests of the policy makers and the public.
b. the lack of efficient and skilled manpower in centrally planned economies.
c. the inability of policy makers to accommodate the changing information about costs and demand of producers and consumers.
d. the unmanageable size of the economies that makes planning too difficult.
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
82. Assume that the clothing market is a monopoly but perfect competition prevails in the market for food. Which of the following is true in this context?
a. The price ratio of clothing and food equals the ratio of their marginal costs.
b. The price ratio of clothing and food is greater than the ratio of their marginal costs.
c. The price ratio of clothing and food is less than the ratio of their marginal costs.
d. The price ratio of clothing and food equals unity.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
83. If there is a monopoly in the capital market, whereas the labor market is competitive then:
a. the rental rate of capital will be greater than the wage rate.
b. the labor market will be in equilibrium, but there will be excess supply in the capital market.
c. the marginal rate of technical substitution must be greater than the input price ratio.
d. the capital market will be in equilibrium, but there will be excess demand in the labor market.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
84. Markets fail to satisfy the conditions of Pareto optimality when:
a. exchanges that would make at least one person better off and no one else worse off go unrealized.
b. exchanges that would produce a more equitable distribution of goods go unrealized.
c. market exchanges allow one party to acquire some of the surplus from the other party.
d. none of the consumers are able to achieve the maximum utility from consumption.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
85. Which of the following is not a cause of economic inefficiency?
a. Market power
b. Externalities
c. Free entry and exit of firms
d. Imperfect information
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
86. Identify the correct statement:
a. Public goods are usually associated with negative externalities.
b. As public goods provide benefits to multiple consumers, it must be provided by the government.
c. Public goods are usually overproduced.
d. Public goods can result in inefficiency even if perfect competition prevails.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
Question type: True/False
87. General equilibrium analysis is useful for analyzing markets when changes are initiated in one market and repercussions are almost nonexistent.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
88. General equilibrium analysis considers the impact of a change in government policy on a market in isolation.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
89. General equilibrium analysis is useful for analyzing markets when changes are initiated in one market but they affect prices and output in other markets.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
90. General equilibrium analysis is useful for analyzing market conditions when there is no mutual interdependence among markets.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
91. General equilibrium analysis assumes that a change initiated in a market does not affect prices in other markets.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
92. General equilibrium analysis determines changes in equilibrium price in a market assuming that all other markets are in equilibrium.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
93. The ceteris paribus assumption is crucial in determining changes in price and quantity in general equilibrium analysis.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
94. General equilibrium analysis is useful in determining price and quantity of goods and services when the markets mutually interdependent.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
95. Some of the points on the welfare frontier are efficient.
Learning Objective: Explain the concept of economic efficiency.
96. The welfare frontier is downward sloping.
Learning Objective: Explain the concept of economic efficiency.
97. Any point on the welfare frontier is preferred to any point inside it.
Learning Objective: Explain the concept of economic efficiency.
98. The marginal rate of substitution [MRS] is equal to the marginal rate of transformation [MRT] at all points on the welfare frontier.
Learning Objective: Explain the concept of economic efficiency.
99. Every point along the welfare frontier is efficient.
Learning Objective: Explain the concept of economic efficiency
100. Every point along the welfare frontier shows a suboptimal allocation of resources.
Learning Objective: Explain the concept of economic efficiency
101. Movements along the welfare frontier makes one person better off without harming anyone.
Learning Objective: Explain the concept of economic efficiency
102. The amount of resources available is different at different points on the welfare frontier.
Learning Objective: Explain the concept of economic efficiency
103. Every point on the contract curve indicates an inefficient distribution of goods among consumers.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
104. At any point on the contract curve, all the consumers have equal marginal rates of substitution.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
105. A movement along the contract curve indicates that, any trade that benefits one person will necessarily benefit the other.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
106. At every point on the contract curve, the marginal utility derived from the consumption of a good is identical for all the consumers.
Learning Objective: Outline the three conditions necessary for the attainment of economic efficiency.
107. Every point along a contract curve in an Edgeworth production box indicates an equal distribution of all resources across all the firms.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
108. Every point along a contract curve in an Edgeworth production box directly corresponds to a specific point on a production possibility frontier.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
109. Every point along an isoquant defines a competitive equilibrium.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
110. Every point along a production possibility frontier represents an efficient output mix.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
111. International trade makes it possible to consume better quality goods at a high price.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
112. International trade makes the domestic producers of import substitutes better off.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
113. International trade makes it possible to consume outside of the production possibility frontier.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
114. In the absence of international trade, a country always produces at a point below the production possibility frontier.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
115. Public goods are usually associated with negative externalities.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
116. As public goods provide benefits to multiple consumers, it must be provided by the government.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
117. Public goods are usually overproduced.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
118. Public goods can result in inefficiency even if perfect competition prevails.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
119. A parade is a public good.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
120. An allocation of resources is efficient when it is not possible, through any feasible change in resource allocation, to benefit one person without making any other person worse off.
Learning Objective: Explain the concept of economic efficiency.
121. An allocation of resources is inefficient when it is possible, through some feasible change in the allocation of resources, to benefit at least one person without making any other person worse off.
Learning Objective: Explain the concept of economic efficiency.
122. Every single point lying on the welfare frontier satisfies the definition of economic efficiency.
Learning Objective: Explain the concept of economic efficiency.
123. Every single point lying inside the welfare frontier represents an inefficient allocation of resources.
Learning Objective: Explain the concept of economic efficiency.
124. We cannot conclude that any efficient position is better than any inefficient position.
Learning Objective: Explain the concept of economic efficiency.
125. Economists generally claim that one resource allocation is superior to any other at least based on their market assumptions.
Learning Objective: Explain the concept of economic efficiency.
126. For economists, the goal is always efficiency.
Learning Objective: Explain the concept of economic efficiency.
127. The PPF slope is also known as the marginal rate of transformation.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
128. It is always possible to change the output mix and leave consumers better off whenever their common marginal rates of substitution are not equal to the marginal rate of transformation.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
Question type: Essay
129. What is the difference between partial and general equilibrium analysis?
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
130. If Good P and Good Q are perfect complements, explain with the help of suitable diagrams, the spillover and feedback effects of a per-unit tax on Good P.
Learning Objective: Delineate the difference between partial and general equilibrium analysis.
131. Why is efficiency considered to be a reasonable goal for economic performance?
Learning Objective: Explain the concept of economic efficiency.
132. Suppose a country produces only two goods – wheat [W] and corn [C]. The marginal rate of transformation [MRT] under autarkic condition is 2W/1C. The world price ratio is 1W/1C. Illustrate with the help of a suitable diagram, how the country will benefit if it indulges in international trade.
Learning Objective: Show how efficiency in output is related to the production possibility frontier.
133. What are the conditions for efficiency in distribution, efficiency in production, and efficiency in output?
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
134. Explain how the three primary conditions of economic efficiency are achieved under perfect competition?
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
135. Answer the following:
a) Discuss the importance of information in achieving economic efficiency.
b) How is information available in the real world?
c) What role does the market play in making relevant information available?
Learning Objective: Demonstrate how perfect competition satisfies all three conditions for economic efficiency.
136. According to Hayek, can there ever be an objectively defined efficient outcome other than what currently exists? Explain.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
137. Explain why economic efficiency cannot be achieved under certain circumstances.
Learning Objective: Spell out the reasons why economic efficiency may not be achieved.
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Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key
By Edgar K. Browning, Mark A. Zupan