Microeconomics Theory and Applications 12th Edition Browning Test Bank Download

Test Bank for Microeconomics Theory and
Applications 12th Edition Browning Zupan

1118758870 9781118758878
Download full test bank at:

https://testbankpack.com/p/test-bank-for-microeconomics-
theory-and-applications-12th-edition-browning-zupan-1118758870-
9781118758878/
Download full solution manual at:

https://testbankpack.com/p/solution-manual-for-microeconomics-
theory-and-applications-12th-edition-browning-zupan-1118758870-
9781118758878/
Package: Test Bank

Title: Microeconomics: Theory and Application, 12e
Chapter Number: 6
Question Type: Multiple Choice
1. Exchange is mutually beneficial when it is _____.
a. between poor economies

b. voluntary
c. controlled by the government
d. ethical
Answer: B
Difficulty Level: Easy

Section Reference: Two-Person Exchange
Learning Objective: Understand why voluntary exchange is mutually beneficial.
2. Which of the following must be true for voluntary exchange to be mutually beneficial?
a. The parties to the exchange do not cheat

b. The presence of a middleman
c. The use of currency for exchange
d. All individuals are risk averse
Answer: A

3. Qualifications to the tenet that voluntary exchange is mutually beneficial include the criterion
that _____.
a. the individual’s preferences will not change during the transaction

b. the outcome of the exchange must be equitable as well as efficient
c. one individual is made better off at the expense of the other
d. benefit is evaluated after the transaction
Answer: A

4. An endowment refers to _____.
a. a set of property rights

b. a diversified portfolio
c. an initial distribution of goods
d. a set of least-cost production possibilities
Answer: C

5. If the MRS at an initial market basket between books [B] and Frisbees [F] is 6B/1F for Dave
and 3B/1F for Diane, then:
a. mutually beneficial trades are not possible.

b. Diane will accept 4 books from Dave.
c. Diane will accept 2 books from Dave.
d. Dave will accept 2 Frisbees from Diane.
Answer: D
Difficulty Level: Medium

6. At their current distributions, Andrew’s marginal rate of substitution of hamburgers for fish
sticks is 6 while Betty’s is 2. Both Andrew and Betty could be made better off if:
a. they do not trade and keep their present allotment of hamburger and fish sticks.
b. Andrew trades between two and six of his allotment of hamburgers with Betty for a fish stick.
c. Andrew trades between two and six of his allotment of fish sticks with Betty for a hamburger.
d. Andrew gives all of his hamburgers to Betty for all of her fish sticks.
Answer: B

Section: Two-Person Exchange
7. If the MRS at an initial market basket between books [B] and Frisbees [F] is 6B/1F for Dave
and 3B/1F for Diane, then:
a. Diane will accept 3 books from Dave for 1 Frisbee.

b. Diane will accept 2 books from Dave for 1 Frisbee.
c. mutually beneficial trades are not possible.
d. Dave will offer 7 books for 1 Frisbee from Diane.
Answer: A

8. When the marginal rates of substitution [MRSs] for a given distribution of goods differ for
two parties, which of the following is incorrect?
a. Mutually beneficial trade is possible.

b. Indifference curves are intersecting.
c. The efficient outcome is unique.
d. Trade can make at least one party better off.
Answer: C

9. Table 6.1 lists five baskets of two goods, pizza and coke, for each of two consumers, Jane and
Bill.
Jane Bill
Basket Pizza Coke Basket Pizza Coke
A 20 2 A 20 10
B 16 4 B 22 8
C 12 6 C 26 6
D 8 8 D 32 4
E 4 10 E 40 2
Jane and Bill are indifferent between all of these baskets. From the information in Table 6.1, you
can conclude that MRSPC is:
a. constant for Jane but not for Bill

b. constant for both Jane and Bill
c. constant for Bill but not for Jane
d. not constant for both Jane and Bill
Answer: A

10. Table 6.1 lists five baskets of two goods, pizza, and coke, for each of two consumers, Jane
and Bill.
Jane Bill
A 20 2 A 20 10
B 16 4 B 22 8
C 12 6 C 26 6
D 8 8 D 32 4
E 4 10 E 40 2
In Table 6.1, if initially Jane has basket B and Bill has basket D, then we can conclude that a
mutually beneficial trade _____.
a. does not exist

b. requires that Jane sell Pizza and Bill sell Coke
c. requires that Jane sell either Coke or Pizza
d. requires that Jane sell Coke and Bill sell Pizza
Answer: A

11. Table 6.1 lists five baskets of two goods, pizza, and coke, for each of two consumers, Jane
and Bill.
Jane Bill
A 20 2 A 20 10
B 16 4 B 22 8
C 12 6 C 26 6
D 8 8 D 32 4
E 4 10 E 40 2
In Table 6.1, if initially Jane has basket D and Bill has basket A, then we can conclude that a
mutually beneficial trade _____.
a. does not exist

b. requires that Jane sell Pizza and Bill sell Coke
c. requires that Jane sell either Coke or Pizza
d. requires that Jane sell Coke and Bill sell Pizza
Answer: D

12. Suppose, given their initial endowments of milk [M] and cookies [C], you know that
Ashley's marginal rate of substitution of cookies for milk [MRSCM] = 3M/1C, Bill's MRSCM =
8M/8C, and Carol's MRSCM = 5M/10C. Given this information, a mutually beneficial trade:
a. cannot not exist between the three individuals.

b. would involve Ashley and Bill selling cookies to Carol.
c. would involve Ashley and Bill selling milk to Carol.
d. would involve Carol selling milk to Ashley and cookies to Bill.
Answer: C

13. Suppose, given their initial endowments of milk [M] and cookies [C], we know that Ashley's
marginal rate of substitution of cookies for milk [MRSCM] = 3M/6C, Bill's MRSCM = 8M/8C, and
Carol's MRSCM = 5M/10C. Given this information we know that a mutually beneficial trade does
not exist between:
a. Ashley and Carol or between Ashley and Bill.
b. Ashley and Bill, but it does exist between Ashley and Carol.
c. Ashley and Carol, but it does exist between Carol and Bill.
d. any of the three individuals.
Answer: C

14. Suppose, given their initial endowments of milk [M] and cookies [C], we know that:
Ashley's marginal rate of substitution of cookies for milk [MRSCM] = 3M/1C; Bill's MRSCM =
8M/8C; and Carol's MRSCM = 5M/10C. Given this information we know that a mutually
beneficial trade would involve Ashley selling ______ to Carol and Bill selling ______ to Ashley.
a. milk; cookies
b. milk; milk
c. cookies; milk
d. cookies; cookies
Answer: C

15. Suppose, given their initial endowments of milk [M] and cookies [C], we know that:
Ashley's marginal rate of substitution of cookies for milk [MRSCM] = 3M/1C; Bill's MRSCM =
8M/8C; and Carol's MRSCM = 5M/10C. Given this information we know that a mutually
beneficial trade would involve Carol selling _____ to Bill and Ashley selling _____ to Bill.
a. milk; cookies
b. milk; milk
c. cookies; milk
d. cookies; cookies
Answer: C

16. Assume that Jeff and Jane both consume only two goods, burgers, and soft drinks. Jeff is
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:
a. Jeff should trade soft drinks for burgers.

b. Jeff would be willing to trade, but Jane would not.
c. Jeff should trade burgers for soft drinks.
d. Jane would be willing to trade, but Jeff would not.
Answer: A

Section Reference: Efficiency in the Distribution of Goods
Learning Objective: Explain what economists mean by efficiency in exchange and the benefits
associated with the promotion of such efficiency.
17. What are the dimensions of the Edgeworth box if Frank's endowment is 15 hamburgers and
20 soft drinks per month and Linda's endowment is 12 hamburgers and 25 soft drinks?
a. 27 hamburgers and 45 soft drinks

b. 15 hamburgers and 20 soft drinks
c. 15 hamburgers and 25 soft drinks
d. 35 hamburgers and 37 soft drinks
Answer: A

Learning objective: Understand why voluntary exchange is mutually beneficial.
18. The vertical and horizontal dimensions of an Edgeworth box diagram are determined by:
a. the division of commodities between two consumers.

b. the total quantities of the two commodities in question.
c. the initial endowments of two commodities among two individuals.
d. the willingness of consumers to exchange.
Answer: B

19. Figure 6-1 shows the distribution of steak and wine between Monica and Hank.
At point A in Figure 6-1, Monica's endowment of steak and wine is _____, respectively.
a. OHZ and OMS

b. FG and ZV
c. OMS and OMV
d. OHF and ZV
Answer: B
20. Given an Edgeworth exchange box showing Homer’s and Sandy’s endowments of donuts
and coffee:
a. for Homer to have more coffee Sandy must have less donuts.
b. if Sandy is on the contract curve Homer must be off the contract curve.
c. Homer and Sandy will be equally well off at any point on the contract curve.
d. for Sandy to have more coffee Homer must have less coffee.
Answer: D

A movement from A to J in Figure 6-1 would:
a. make both Hank and Monica better off.

b. benefit Monica but harm Hank.
c. benefit Monica and leave Hank no worse off.
d. benefit Hank and leave Monica no worse off.
Answer: C
In Figure 6-1, a movement from J to K:
a. is ideal because the steak and wine are more equally divided between Hank and Monica.
b. is preferred to a move from J to H.
c. benefits Hank and harms Monica.
d. harms both Hank and Monica.
Answer: C

Regarding the distribution of steak and wine in Figure 6-1, it is correct to say that:
a. at A, the marginal rates of substitution [MRSs] between steak and wine differ for Hank and
Monica.
b. at A, Hank and Monica will engage in further trade which will eventually make one of them
worse off.
c. at H, Monica is better off at Hank’s expense.
d. trade between Monica and Hank will eventually lead them to the unique efficient outcome K.
Answer: A

24. When the marginal rates of substitution differ, then:
a. mutually beneficial trade is not possible.

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. indifference curves intersect inside the Edgeworth box.
Answer: D

25. In an Edgeworth exchange box diagram, if the two consumers' indifference curves intersect
at point A, then:
a. point A is on the contract curve.

b. the consumers' MRSs’ differ.
c. voluntary exchange will not change the distribution of goods between consumers.
d. the contract curve is convex to the origin.
Answer: B

26. If Frank's and Jan's indifference curves intersect at the endowment point A, then:
a. A is on the contract curve.

b. trade will make one of them better off while making the other one worse off.
c. both indifference curves would cross the contract curve before they intersected again.
d. A can be on either Frank's or Jan's contract curve but not both.
Answer: C

27. 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. trade can benefit Bill but not affect Terry.
c. there can be no mutually beneficial trades.
d. the potential to trade would depend on Bill’s and Terry’s bargaining skills.
Answer: C

28. When the marginal rates of substitution differ for two consumers:
a. indifference curves are tangent.

b. mutually beneficial trade is possible.
c. multiple prices for goods emerge.
d. the consumer with steeper indifference curves is happier.
Answer: B

29. When the marginal rates of substitution for two consumers differ:
a. the consumers’ indifference curves are tangent.

b. consumers will exchange goods and can end up anywhere inside the area bounded by their
indifference curves.
c. consumers will exchange goods and will end up on the contract curve inside the area bounded
by their indifference curves.
d. consumers will exchange goods and will end up on the contract curve, but not necessarily
inside the area bounded by their indifference curves.
Answer: B

30. At their present allocation of hot chocolate and marshmallows, Tom’s marginal utility from
hot chocolate is 10 and for marshmallows it’s 2, while Cara’s marginal utility is 4 and 12,
respectively. How can Tom and Cara make each other better off?
a. Tom can consume six more marshmallows so that his marginal utility equals that of Cara.
b. Cara can provide Tom some of both hot chocolate and marshmallows in order to equalize their
marginal values for both goods.
c. Tom can trade some hot chocolate with Cara in exchange for some marshmallows.
d. Tom can trade marshmallows with Cara for some hot chocolate.
Answer: D

Section: Efficiency in the Distribution of Goods
31. When the marginal rates of substitution for two consumers differ:
a. the indifference curves of the consumers are tangent.

b. mutually beneficial trade cannot take place.
c. consumers’ bargaining skills will determine their position on the contract curve.
d. trade will benefit one of the consumers and harm the other consumer.
Answer: C

32. Economic efficiency is sometimes referred to as _____.
a. social welfare
b. Pareto optimality
d. relative efficiency
c. equity
Answer: B

33. Trade between two consumers will continue until it is no longer mutually beneficial. This
does not imply that the final outcome will be a unique equilibrium because _____.
a. the exchange is not competitive

b. the consumers are both price takers
c. the Pareto optimality condition is not satisfied
d. the marginal rates of substitution differ for both consumers
Answer: A

34. Suppose Jen and Mike have initial distributions of movie theater passes and gallons of gas
such that Jen’s marginal utility of movie passes and gasoline are both 5, while Mike’s marginal
utility of movie passes and gasoline are 8 and 1 respectively. If movie theater passes are $9 each
and gasoline is $3 per gallon, which of the following should occur?
a. Jen should trade gasoline for movie passes until her marginal utilities for both are 3 and 1
respectively.
b. Mike should trade movie passes for gallons of gasoline until his marginal utilities for each
is 2 and 3 respectively.
c. Mike should trade gasoline to Jen for movie passes until the marginal utilities of both goods
are the same between the two of them, and their marginal rates of substitution of movie passes
for gasoline are both equal to 3.
d. Mike should trade gasoline to Jen for movie passes until the marginal utility of gasoline for
each is three times the marginal utility of movie passes for each.
Answer: C

35. If through prior trade, the marginal rates of substitution for two goods between two people
are equal, we say that the last trade:
a. made one person better off and the other worse off.
b. was Pareto optimal.
c. was Edgeworth final.
d. was inefficient.
Answer: B

36. Which of the following is true of the contract curve?
a. The contract curve is an enforceable agreement between parties to an exchange.

b. The contract curve designates the potential trade possibilities along an indifference curve.
c. The contract curve delineates all Pareto efficient allocations in an Edgeworth box.
d. The contract curve defines the equitable exchanges anywhere in an Edgeworth box.
Answer: C

37. Figure 6-2 shows an Edgeworth box with the preferences of Kathy and Tom toward bread
and candy.
In Figure 6-2, a movement from B to D will:
a. harm Tim and benefit Kathy.

b. harm both Tim and Kathy.
c. benefit Tim and harm Kathy.
d. benefit both Tim and Kathy.
Answer: A

and candy.
In Figure 6-2, a movement from D to B will:
a. harm Tim and benefit Kathy.

b. harm both Tim and Kathy.
c. benefit Tim and harm Kathy.
d. benefit both Tim and Kathy.
Answer: C
Difficulty Level: E
and candy.
In Figure 6-2, a movement from D to A will:
a. benefit Tim but not affect Kathy.

b. harm Tim but benefit Kathy.
c. benefit Tim but harm Kathy.
d. not affect Tim but benefit Kathy.
Answer: D

and candy.
Refer to the Edgeworth box in Figure 6-2. Which of the following statements is true?
a. Point A is more efficient than point E.

b. Point E is more efficient than point C.
c. Point C is more efficient than point B.
d. Point B is more efficient than point A.
Answer: D

41. A distribution of goods between Jack and Jill is efficient when:
a. Jack can be made better off without harming Jill.

b. neither Jack nor Jill can be made better off without reducing total utility.
c. Jill can be made better off without harming Jack.
d. both Jack and Jill can be made better off without reducing total utility.
Answer: B

and candy.
At point C in Figure 6-2, which of the following is true of the comparison between Tim's
marginal ate of substitution of candy for bread [MRSCB] and Kathy's MRSCB?
a. Tim’s MRSCB is greater than Kathy’s MRSCB.

b. Tim’s MRSCB is smaller than Kathy’s MRSCB.
c. Tim’s MRSCB is equal to Kathy’s MRSCB.
d. Tim’s MRSCB is zero and Kathy’s MRSCB is positive.
Answer: C

In Figure 6-1, points on the contract curve would include _____.

a. A and J
b. J and K
c. H and A
d. K and L
Answer: B

44. Along the contract curve _____.
a. every point is equitable

b. two individuals have equal marginal rates of substitution
c. any trade that benefits one person will necessarily benefit the other
d. indifference curves of consumers are intersecting
Answer: B

45. Which of the following is true of an efficient distribution of two goods among two
individuals?
a. The efficient distribution of goods is represented by a point off the contract curve.
b. The individuals' marginal rates of substitution are not equal at an efficient distribution of
goods.
c. If the distribution of two goods is efficient, one person can be made better off without harming
the other.
d. The point of tangency between two indifference curves shows an efficient distribution of
goods.
Answer: D

46. In an Edgeworth Box diagram, showing the distribution of two goods among two
individuals:
a. there is one unique efficient point.

b. there are many possible efficient points.
c. if trade occurs among points along the contract curve it will leave both individuals better off.
d. every point of intersection between the two individuals' indifference curves is efficient.
Answer: B

47. A Pareto optimal distribution of goods is _____.
a. always efficient and equitable

b. efficient but not always equitable
c. not always efficient but equitable
d. neither efficient nor inequitable
Answer: B

48. Which of the following is true of the contract curve?
a. All points on the contract curve are potential points of equilibrium but not all are efficient.
b. All points on the contract curve are potential points of equilibrium and are efficient.
c. A movement from one point on the contract curve to another reduces total welfare.
d. The midpoint of the contract curve is the most efficient point because it is the most equitable.
Answer: B

49. Which of the following statements about the contract curve is correct?
a. The slope of the contract curve reflects the relative prices of the goods to consumers.
b. All points on the contract curve are efficient.
c. A point below the contract curve is always preferred to a point above the curve.
d. A point on the contract curve shows inequitable allocation of resources.
Answer: B

50. Two goods are allocated efficiently between consumers when _____.
a. the quantities of goods they consume are equal

b. the marginal rates of substitution between the two goods are the same for both consumers
c. there can be further exchanges that will make both consumers better off
d. redistribution makes one consumer better off at the expense of the other
Answer: B
51. Two goods are said to be allocated efficiently between consumers when _____.
a. both goods give the consumers the same total utility

b. there are no trades that will make one of the consumers strictly worse off
c. one consumer is as well off as possible, given the utility of the other consumer
d. both the consumers are maximizing utility
Answer: C

52. Two goods are allocated inefficiently between consumers when _____.
a. both consumers will lose from any further trades

b. it is impossible to make further trades and increase welfare
c. further trade will make one consumer worse off and not affect the other
d. welfare of both consumer can be increased with further trade
Answer: D

and candy.
Refer to Figure 6-2. Relative to point D, Tim's marginal rate of substitution of cookies for milk
[MRSCB] at point C is _____.
a. indeterminate
b. 0
c. the same as at point D
d. larger, smaller or the same as at point D
Answer: C

54. In an Edgeworth box diagram, which of the following statements is incorrect?
a. A point of tangency between two indifference curves identifies the uniquely best distribution
of goods between consumers.
b. It is possible to move from an inefficient point to an efficient point in a way that makes one
consumer better off and the other no worse off.
c. Some inefficient distributions of the good may be preferred to some efficient distributions on
equity grounds.
d. It is possible to move from a point off the contract curve to a point on the contract curve and
make both consumers better off.
Answer: A

Section Reference: Competitive Equilibrium and Efficient Distribution
Learning Objective: Discuss how competitive markets promote efficient distribution of goods
between consumers.
55. The initial endowment of goods:
a. has no effect on the equity of the final outcome.

b. does not affect the relative importance of the goods to each consumer.
c. determines the unique outcome of exchange between the two consumers.
d. affects the final distribution of goods along a contract curve.
Answer: D

between consumers.
56. Why is it difficult to compare two efficient points and decide which one is better?
a. The Pareto efficiency criterion cannot be applied to more than one allocation.
b. Interpersonal comparisons cannot be made scientifically.
c. The criteria for efficiency are subjective.
d. There is no difference between various efficient allocations.
Answer: B

Section: Competitive Equilibrium and Efficient Distribution
between consumers.
57. How does a competitive exchange differ from a two-person model of exchange?
a. The Pareto criterion is satisfied only in a competitive exchange and not in a two-person
exchange.
b. In two-person exchanges, the exact outcome of bargaining cannot be predicted unlike with a
competitive exchange.
c. The outcomes of two-person exchanges tend to be more equitable than competitive exchanges.
d. In two-person exchanges consumers are price-takers while competitive exchange involves
price-makers.
Answer: B
between consumers.
58. In choosing between points along the contract curve:
a. the decision rule is the greatest good for the greatest number of people.
b. scientific criteria can be used to lead us to the correct distribution of goods.
c. subjective criterion is required to allocate resources.
d. efficiency is always preferred to inefficiency.
Answer: C

between consumers.
59. Which of the following is the best example of a price taker market?
a. Gasoline retailers in a large suburban area

b. Residential real estate in a rural area
c. Passenger automobiles
d. Computer games
Answer: A

between consumers.
60. Which of the following is true of price taking firms?
a. They cannot affect price by haggling

b. They face an inelastic demand curve
c. They are also price takers in the input market
d. They cannot affect the market supply of a good
Answer: A

between consumers.
61. The market equilibrium in a many-person setting is an:
a. efficient allocation even though the terms of exchange are indeterminate.

b. efficient allocation because all traders face the same prices.
c. inefficient allocation. Although each pair of traders may arrive at the contract curve, the
marginal rates of substitution for different trading pairs may not be equal.
d. inefficient allocation because not everyone likes the prices the market sets.
Answer: B

between consumers.
62. Which of the following describes the equilibrium in an Edgeworth box?
a. Any point where the indifference curves of the two individuals intersect
b. All points that show an equal distribution of the two goods between the two individuals
c. Any point inside the box representing scope for mutually beneficial trade.
d. A point of tangency between the indifference curves of the two individuals.
Answer: D

between consumers.
63. Which of the following is most likely to be the most efficient method of allocation of a
scarce resource?
a. A first-come, first-served policy

b. Doling out coupons with the right to purchase a good
c. Conducting a lottery for the right to purchase a good
d. A competitive exchange
Answer: D
between consumers.
64. A competitive equilibrium:
a. results in an efficient and equitable allocation.

b. is characterized by equal marginal rates of substitution.
c. occurs when resources are equally allocated between different producers.
d. is not necessarily utility-maximizing.
Answer: B

between consumers.
65. A secondary market for the resale of baseball tickets, known as scalping:
a. prevents mutually beneficial exchanges.

b. is likely to increase revenues for the team owner since season ticket holders can resell their
tickets instead of not attending a game.
c. is likely to increase season-ticket sales since some people who wouldn’t have otherwise seen
the game, will buy tickets.
d. lowers the ability of the season ticket holders to attend a baseball game with their families.
Answer: B

between consumers.
66. Allowing prices to ration goods among consumers results in an:
a. inefficient distribution of goods because the wealthy get the highest quantity.
b. efficient distribution of goods because goods go to those who value them the most.
c. inefficient distribution of goods because goods go to those who value them the most.
d. efficient distribution of goods because the wealthy consumers are unable to buy the quantity
they wish.
Answer: B

Section Reference: Price and Nonprice Rationing and Efficiency
Learning Objective: Explore the extent to which price and nonprice mechanisms for rationing
goods across consumers serve to promote efficiency.
67. Nonprice rationing systems usually are:
a. inefficient because it is unlikely that those who value the good the most will get it.
b. inefficient because they result in surpluses in the market.
c. efficient because more emphasis is placed on equity and less on wealth.
d. efficient because goods are distributed to those who deserve them most.
Answer: A

68. A ration scheme using coupons could lead to an efficient outcome if _____.
a. consumers could trade coupons with each other

b. the government allocates coupons among consumers
c. the coupons were replaced with money
d. the number of coupons in circulation was limited
Answer: A

Section: Price and Nonprice Rationing and Efficiency
69. Consider a price-controlled good allocated to consumers on a first-come, first-served basis.

Consumers end up waiting in line to purchase the good, and this:
a. is more efficient, the higher the opportunity cost of the consumers’ time in line.
b. is more equitable than handing out coupons.
c. is less efficient, the higher the opportunity cost of the consumers’ time in line.
d. is less equitable than handing out coupons.
Answer: C

70. Hurricane Ike led to landfall in Galveston, Texas in September 2008. One effect of Ike was
to disrupt gasoline supplies, especially to stations in the southeast United States, many of which
were unable to raise the price of their gasoline due to legislated anti-price gouging laws.
Consequently, people waited for up to four hours for gasoline, provided they were able to find a
station that had gasoline to sell. The effect of these anti-price gouging statutes is:
a. to make consumers better off since there is no cost to spend time waiting in line.
b. to ensure that the marginal utility of gasoline across all consumers in a region is equal.
c. to allocate gasoline so that those who value it most are able to get some.
d. to allocate gasoline to those who value it less at the expense of those who value it more.
Answer: D

71. Compared to rationing by prices, non-price rationing by queuing:
a. is more efficient in that those who value the good or service most are more likely to get some.
b. is less efficient in that waiting in line imposes a cost on those waiting in line, with no
offsetting benefit to the seller.
c. is less efficient in that in order to sell more of the good or service, suppliers will have to
increase the quality of their product beyond what the consumer desires.
d. is more efficient in that in order to sell more of the good or service, suppliers will have to
increase the quality of their product beyond what the consumer desires.
Answer: B

72. Any system of nonprice rationing could be inefficient because _____.

a. consumers are benefited at the producer's expense
b. it would be virtually impossible to determine consumer preferences
c. buyers and sellers act in self-interest which leads to inefficiency
d. marginal values do not vary across consumers
Answer: B

73. Two consumers Jim and Pam both have opera tickets and movie tickets. They wish to
exchange tickets with each other. Jim’s utility function can be expressed as U J (OJ , M J ) and
Pam’s as U P (OP , M P ) . An efficient distribution of the fixed quantities of opera and movie
tickets between Jim and Pam can be described as:
a. one that maximizes their combined level of utility

b. one that maximizes the utility of Pam subject to the constraint that Jim’s utility is held fixed at
some level
c. one that minimizes the utility of Jim subject to the constraint that Pam’s utility is help fixed at
some level
d. simultaneously maximizes their individual levels of utility
Answer: B
Difficulty Level: Hard

Section: Some of the Mathematics Behind Efficiency in Exchange
Pam’s as U P (OP , M P ) . If you take maximizing Pam’s utility as the objective function there are
how many constraints to be accounted for?
a. 1
b. 2
c. 3
d. 4
Answer: C

Pam’s as U P (OP , M P ) . If you take maximizing Pam’s utility as the objective function there are
how many constraints to be accounted for?
a. 1
b. 2
c. 3
d. 4
Answer: C

Question Type: Essay
73. Let the total quantities of two goods, apples and oranges, be 100 and 200 respectively. Jill
has an initial allocation of 50 apples and 100 oranges and considers the two goods perfect 1-for-1
substitutes. Jack considers apples and oranges perfect 1-for-1 complements. Using an Edgeworth
box, describe the set of allocations which improve economic efficiency.
Answer:
The initial allocation is at the center of the Edgeworth exchange box, point A, where Jill has 50
apples and 100 oranges and Jack has the same quantities. Jill’s indifference curve through point
A has a slope of –1. Jack’s indifference curve through point A is right-angle AEC. We know this
because Jack considers apples and oranges perfect 1-for-1 complements, therefore the corners of
his indifference curves will lie along the 45-degree line which starts at his origin. Thus, any point
inside triangle AEC will be preferred by both Jack and Jill to point A and thus improve economic
efficiency.

74. What did the moral philosopher Adam Smith mean by his invisible hand theorem?
Answer: Each buyer and seller in a market behaves in his or her own self-interest. Behaving in
one’s self interest means that each individual engages in market exchange with the goal of
maximizing his or her own utility. The invisible hand guides these individual exchanges to a
socially efficient result. The invisible hand is a metaphor that explains that market exchanges
lead to efficient individual as well as social outcomes without a central guiding authority.

between consumers.
75. Answer the following:

a) What is meant by Pareto efficiency? (b) Take an economy with a given level of national
wealth. 40% of the population own 60% of the wealth. The government redistributes the wealth
among the population such that 50% of the population now own 50% of the wealth. Does this
redistribution satisfy the Pareto criterion? Is the new distribution more equitable than the
previous one? Why?
Answer:
a) Vilfredo Pareto, the Italian economist, formulated a rule for efficiency which came to be
known as Pareto optimality. An allocation is considered efficient if the allocation cannot be
changed to make someone better off without making another person worse off. A distribution is
considered efficient if it cannot be rearranged so as to make someone better off without making
another person worse off. It follows from the Pareto optimality rule that an efficient distribution
is one where everyone is at their best possible point. Any change would not increase total
welfare, it would merely redistribute welfare. Interpersonal comparisons cannot be made with the
Pareto criterion.
b) The Pareto criterion for efficiency states that an efficient distribution of fixed total quantities
of goods is one in which it is not possible, through any change in the distribution, to benefit one
person without making some other person worse off. By this rule, the redistribution by the
government is not Pareto efficient. The share of wealth that was owned by 40% of the population
had to be taken away, making them worse off, in order to make 10% of the population better off.
The total wealth available for redistribution has not increased in the economy; the existing
quantity of wealth has only been redistributed. This process of redistribution will inevitably
make some better off at the expense of others.
The new distribution may be more equitable based on the criteria that you use to evaluate
fairness or equity. If the criterion for fairness is that wealth should be evenly spread among the
population, then the new wealth distribution is more equitable. If the criterion for equity is that
those who earned their wealth (40% of the population) should be allowed to keep it, then the new
distribution is unfair. Fairness and equity are normative considerations.

76. How are prices of goods that you buy in an auction, at a garage sale, and at a drugstore
determined? Is the price discovery process the same in all these markets?
Answer: The price discovery process is not the same in all these markets. The price at an auction
is determined by the marginal valuation of the buyers in the audience. The relative importance of
the good to the buyer determines the price. At a garage sale, the possibility of haggling and
strategic behavior arises because it is mostly a two-person exchange. A single buyer or seller,
who is persuasive enough, can influence prices. At a drugstore, the buyers and sellers are price
takers. There are many drugstores and many buyers. A single drugstore or buyer cannot
influence the price and has to take the price as given. The price discovery process varies
depending on the number of buyers in the market (keeping supply unchanged).

between consumers.
77. Explain why a competitive equilibrium produces an efficient allocation of goods.
Answer: Each consumer purchases a combination of goods such that the marginal rate of
substitution (MRS) equals the ratio of the prices. Also an efficient distribution of goods (one that
is on the contract curve) requires that the marginal rates of substitution be equal for the two
consumers. Inequality of MRS’ implies that the consumers place different values on the two
goods and will prefer a different distribution. Each consumer makes their consumption decisions
independently in a competitive market, and they set their own MRS equal to the price ratio. But
because the price ratio is the same for each consumer, their MRSs must be equal to each other,
which is the condition for an efficient allocation of goods.

between consumers.
78. Are non-price allocation mechanisms efficient? Explain.
Answer: Distributing goods according to rules other than prices (such as issuing coupons or
imposing price ceilings) is unlikely to produce an efficient outcome because goods will not be
distributed so that the marginal value is the same for all consumers. For example, a price ceiling
that is set below the market-determined price will create a divergence between the maximum
price allowed and the marginal value consumers place on the good. This marginal value is given
by the height of each individual’s demand curve, which is equal to the maximum the consumer is
willing to pay for another unit of the good. When the marginal values (or marginal rates of
substitution) are not equal across consumers, that allocation of goods is inefficient.

79. What would you expect to see in the market for healthcare if the government decided that
healthcare allocation would be done on the basis of altruism? Why?
Answer: Any allocation mechanism that is not based on prices would lead to an inefficient
outcome; efficiency being defined as the allocation of resources to those who value them the
most. In a market based on altruism, the price of a commodity is zero. On the supply side, a zero
price will reduce or diminish the incentive to sell and increase the quantity demanded for the
good resulting in a shortage in the market. A philanthropist cannot possibly know the preferences
of all the beneficiaries who wish to use healthcare services. In the absence of prices, it will not be
possible to evaluate the marginal value placed by a consumer on a good and goods may not be
allocated to those who place the highest value on them.

exchange tickets with each other. Given their utility functions U J (OJ , M J ) and U P (OP , M P ) ,
show that their marginal rates of substitution need to be equal for any given distribution of
tickets to be efficient.
Answer: For a distribution to be efficient, it has to make Jim as well off as possible keeping
Pam’s well-being unchanged, or make Pam as well off as possible without reducing Jim’s well-
being. Therefore one consumer’s utility is maximized subject to the constraint that the other
consumer has reached a particular level of utility. This can be expressed as:
U J = U J (OJ , M J ) = k ; where k is an arbitrary level of utility.
Since the total number of opera tickets and movie tickets are fixed, there are two more
constraints:
OJ + OP = O *
MJ + MP = M *
where O* and M* are the fixed quantities of the tickets.
Using the Lagrangian technique of constrained profit maximization:
Z = U P (OP , M P ) + 1[k − U J (OJ , M J )] + 2 (O * −OJ − OP ) + 3 (M * −M J − M P )
The first-order condition for a maximum require setting the partial derivatives (with respect to
OJ, MJ, OP, MP, λ, λ1 and λ2) equal to zero. However, we only need the first four conditions.
Z U P
= – 2 = 0 − − − − − − − − − − − − − −1
OP OP
Z U P
= – 3 = 0 − − − − − − − − − − − − − −2
M P M P
Z U J
= −1 – 2 = 0 − − − − − − − − − − − −3
OJ OJ
Z U J
= −1 – 3 = 0 − − − − − − − − − − − −4
M J M J
Dividing equation 1 by 2 and equation 3 by 4 gives:

U P
OP 2
=
U P 3
M P
U J
OJ 
= 2
U J
3
M J
The left-hand sides of both the above equations are the ratios of the marginal utilities of both
Pam and Jim. Ratios of marginal utilities are the same as their marginal rates of substitution.

Since both are equal to 2 , they must be equal to each other.
3

Section Reference: Some of the Mathematics behind Efficiency in Exchange
Learning Objective: Explain the mathematics behind efficiency in exchange.

Microeconomics Theory and Applications 12th Edition Browning Test Bank Download

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Microeconomics Theory and Applications 12th Edition Browning Test Bank Download

Uploaded by

Copyright:

Available Formats

Test Bank for Microeconomics Theory and

Applications 12th Edition Browning Zupan

Download full test bank at:

Download full solution manual at:

Package: Test Bank

Question Type: Multiple Choice

1. Exchange is mutually beneficial when it is _____.

a. between poor economies

Difficulty Level: Easy

a. The parties to the exchange do not cheat

Difficulty Level: Easy

a. the individual’s preferences will not change during the transaction

Difficulty Level: Easy

4. An endowment refers to _____.

a. a set of property rights

Difficulty Level: Easy

a. mutually beneficial trades are not possible.

Difficulty Level: Medium

Difficulty Level: Medium

a. Diane will accept 3 books from Dave for 1 Frisbee.

Difficulty Level: Medium

a. Mutually beneficial trade is possible.

Difficulty Level: Medium

a. constant for Jane but not for Bill

Difficulty Level: Medium

a. does not exist

Difficulty Level: Medium

a. does not exist

Difficulty Level: Medium

a. cannot not exist between the three individuals.

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Medium

Difficulty Level: Medium

a. Jeff should trade soft drinks for burgers.

Difficulty Level: Medium

a. 27 hamburgers and 45 soft drinks

Difficulty Level: Easy

a. the division of commodities between two consumers.

Difficulty Level: Easy

a. OHZ and OMS

Difficulty Level: Easy

A movement from A to J in Figure 6-1 would:

a. make both Hank and Monica better off.

In Figure 6-1, a movement from J to K:

Difficulty Level: Medium

Difficulty Level: Medium

24. When the marginal rates of substitution differ, then:

a. mutually beneficial trade is not possible.

Difficulty Level: Easy

a. point A is on the contract curve.

Difficulty Level: Easy

a. A is on the contract curve.

Difficulty Level: Medium

a. any trade between Bill and Terry will be mutually beneficial.

Difficulty Level: Easy

a. indifference curves are tangent.

Difficulty Level: Easy

a. the consumers’ indifference curves are tangent.

Difficulty Level: Medium

Difficulty Level: Medium

a. the indifference curves of the consumers are tangent.

Difficulty Level: Easy

32. Economic efficiency is sometimes referred to as _____.