Intermediate Microeconomics and Its

Application 11th Edition Nicholson Test

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TEST BANK FOR CHAPTER 10: General Equilibrium and Welfare
MULTIPLE CHOICE

1. Consider a two-good production economy in which both goods are produced with fixed
proportions production functions. Then, some efficient allocations will exhibit unemployment
of some factor providing
a. the firms use the inputs in different proportions.
b. the firms exhibit diminishing returns to scale.
c. the firms exhibit increasing returns to scale.
d. production can never be efficient if there are unemployed inputs.
ANS: a

2. Suppose two goods (X and Y ) are being produced efficiently and that the production of X is
always more labor intensive than the production of Y. Production depends only on two factors
(capital and labor); these may be smoothly substituted for each other. The total quantities of
these inputs are fixed. An increase in the production of X and a decrease in the production of
Y will
a. increase the capital-labor ratio in each firm.
b. decrease the capital-labor ratio in each firm.
c. leave the capital-labor ratio for each firm unchanged.
d. increase the capital-labor ratio in Y production and decrease the capital -labor ratio in X
production.
ANS: a

3. An efficient allocation of productive inputs requires that

a. each output has the same rate of technical substitution among inputs used.
b. each output has the same marginal rate of substitution for consumers.
c. each pair of outputs has the same rate of product transformation.
d. each individual has the same marginal rate of substitution between outputs.
ANS: a

4. The slope of the production possibility frontier shows

a. the marginal rate of substitution between the two goods.
b. the relative marginal costs of the two goods.
c. the efficient combination of outputs possible using fixed amounts of input.
d. the relative marginal productivities of the two goods.
ANS: b

5. The rate of product transformation refers to

a. how a consumer can trade one good for another while still maximizing his or her utility.
b. how a firm can substitute one input for another and still maintain the same production
level.
c. how production of one good can be substituted for another while still using a fixed supply
of inputs efficiently.
d. how quickly a firm can produce a final good while starting with only natural resources.
ANS: c

1
2 Chapter 10: General Equilibrium and Welfare

6. In an economy consisting of only two goods, corn and cloth, the amount of extra cloth that
can be produced efficiently if corn output is reduced by one unit is equal to
a. the rate of technical substitution for corn divided by the rate of technical substitution for
cloth.
b. the rate of technical substitution for cloth divided by the rate of technical substitution for
corn.
c. the marginal cost of producing cloth divided by the marginal cost of producing corn.
d. the marginal cost of producing corn divided by the marginal cost of producing cloth.
ANS: d

7. Each of the following factors might interfere with the efficiency of perfect competition
except:
a. increasing returns to scale.
b. imperfect price information.
c. externalities.
d. diminishing returns to scale.
ANS: d

8. The reason externalities distort the allocation of resources is that

a. too few goods are usually produced.
b. firms often go out of business because of the externality.
c. a firm’s private costs do not reflect the social cost of production.
d. regulating externalities uses scarce resources.
ANS: c

9. Under a perfectly competitive price system

a. an equitable allocation of the available resources will always result.
b. there is no opportunity for individuals to trade amongst themselves.
c. there is no reason to expect that voluntary trading will result in an equitable allocation of
the available resources.
d. None of the above will result.
ANS: c

10. Consider three ways of allocating two goods in a two-person exchange economy.
I. Both individuals take prices as given and equilibrium prices are established by
an impartial auctioneer.
II. One individual can act as a perfect price discriminator and force the other
individual to pay a different price for each unit of a good that is traded.
III. One individual is a monopolist and can charge the other individual a single,
utility-maximizing price.
Which of these situations is efficient?
a. None of them.
b. Only I.
c. I and II, but not III.
d. I and III, but not II.
ANS: c
 Chapter 10: General Equilibrium and Welfare 3

11. In free exchange among two individuals the position on the contract curve finally arrived at
will, among other things, depend on:
I. The bargaining strength of each individual.
II. The initial endowments of the individuals.
III. The individuals’ preferences.
Which of these correctly completes the statement?
a. II and III, but not I.
b. Only II. e.
c. I and III, but not II.
d. I, II, and III.
ANS: d

12. Markets can fail to achieve efficiency when

a. there are prices consumers do not think are fair.
b. there are wages workers do not think are fair.
c. trade puts people out of work.
d. there are public goods.
ANS: d

13. Markets can fail to achieve efficiency when

a. there are prices consumers do not think are fair.
b. there are wages workers do not think are fair.
c. trade puts people out of work.
d. there are markets with imperfect competition.
ANS: d

14. Markets can fail to achieve efficiency when

a. there are prices consumers do not think are fair.
b. there are wages workers do not think are fair.
c. trade puts people out of work.
d. there are buyers or sellers without adequate information about the quality of goods.
ANS: d

15. Suppose the Economics Department has a graduation party for its students but as a final test
they must show they have learned something about trade. The men are given food when they
walk in and the women are given drink. Suppose they have identical preferences where food
and drink provide utility . The contract curve in the Edgeworth box using a
representative man and woman would be
a. a right angle connecting the lower left corner with the upper right corner.
b. a curve (not necessarily a line) connecting the lower left corner with the upper right
corner.
c. a line connecting the lower left corner with the upper right corner.
d. a right angle connecting the upper left corner with the lower right corner.
ANS: b
4 Chapter 10: General Equilibrium and Welfare

16. Suppose the Economics Department has a graduation party for its students but as a final test
they must show they have learned something about trade. The men are given food when they
walk in and the women are given drink. Suppose they have identical preferences where food
and drink provide utility . The exchange would be such that
a. both would be guaranteed to be better off than when they entered.
b. both would be guaranteed to be at least as well off as when they entered.
c. the men would end up with more.
d. the women would end up with more.
ANS: b

17. Suppose the Economics Department has a graduation party for its students but as a final test
they must show they have learned something about trade. The men are given food when they
walk in and the women are given drink. Suppose they have very different preferences where
food and drink provide utility. For men . For women U=min(F,D) The contract
curve in the Edgeworth box using a representative man and woman would be
a. a right angle connecting the lower left corner with the upper right corner.
b. a curve (not necessarily a line) connecting the lower left corner with the upper right
corner.
c. a line connecting the lower left corner with the upper right corner.
d. a right angle connecting the upper left corner with the lower right corner.
ANS: c

18. Suppose goods X and Y are produced along a production possibilities frontier 4X2 + Y2 = 500
and they are perfect substitutes such that U = X + Y. The slope of the production possibilities
frontier is . How much X should be produced?

a. 0
b. 5
c. 10
d. 20
ANS: b

19. Suppose goods X and Y are produced along a production possibilities frontier 4X2 + Y2 = 500
and they are perfect substitutes such that U = X + Y. The slope of the production possibilities
frontier is . How much Y should be produced?

a. 0
b. 5
c. 10
d. 20
ANS: d
 Chapter 10: General Equilibrium and Welfare 5

20. Suppose goods X and Y are produced along a production possibilities frontier 4X2 + Y2 = 500
and they are perfect substitutes such that U = X + Y. The slope of the production possibilities
frontier is . What is the MRS at the optimal point?

a. 0
b. -1
c. -4
d. -5
ANS: b

21. Suppose goods X and Y are produced along a production possibilities frontier X2 + 4Y2 = 500
and they are perfect substitutes such that U = X + Y. The slope of the production possibilities
frontier is . How much Y should be produced?

a. 0
b. 5
c. 10
d. 20
ANS: b

22. Suppose goods X and Y are produced along a production possibilities frontier X2 + 4Y2 = 500
and they are perfect substitutes such that U = X + Y. The slope of the production possibilities
frontier is . What is the MRS at the optimal point?

a. 0
b. -1
c. -4
d. -5
ANS: b

23. Suppose goods X and Y are produced along a production possibilities frontier X2 + 4Y2 = 500
and they are perfect substitutes such that U = X + Y. The slope of the production possibilities
frontier is . What is the MRTS at the optimal point?

a. 0
b. -1
c. -4
d. -5
ANS: b
6 Chapter 10: General Equilibrium and Welfare

24. Suppose two coffee snobs who must have their coffee and cream in exact proportions (each
cup is 10 coffee per 1 unit cream) are invited to a weekend long event (during which they can
easily consume 8 cups of coffee). Suppose Snob A is given 8 units of cream and Snob B is
given 80 units of coffee. The contract curve in the Edgeworth box would be
a. a right angle connecting the lower left corner with the upper right corner.
b. a curve (not a line) connecting the lower left corner with the upper right corner.
c. a line connecting the lower left corner with the upper right corner.
d. a right angle connecting the upper left corner with the lower right corner.
ANS: c

25. Suppose two coffee snobs who must have their coffee and cream in exact proportions (each
cup is 10 coffee per 1 unit cream) are invited to a weekend long event (during which they can
easily consume 8 cups of coffee). Suppose Snob A is given 8 units of cream and Snob B is
given 80 units of coffee. The post trading result (one in which any trade that makes both
parties better off than their initial allocation) will guarantee each person
a. nothing
b. at least 1 cup of properly made coffee.
c. at least 2 cups of properly made coffee.
d. exactly 4 cups of properly made coffee.
ANS: b

26. Suppose country A has a production possibilities frontier such that and
country B has a production possibilities frontier such that and consumers in
each country view x and y as perfect substitutes. Country B will produce
a. only x (= ) and trade for y.
b. only y (= ) and trade for x.
c. both x (= 20) and y (= 5) and trade x to get y.
d. both x (= 20) and y (= 5) and trade y to get x.
ANS: c

27. Suppose country A has a production possibilities frontier such that and
country B has a production possibilities frontier such that and consumers in
both countries view x and y as perfect substitutes. Country B will produce
a. only x (= ) and trade for y.
b. only y (= ) and trade for x.
c. both x (= 40) and y (= 20) and trade x to get y.
d. both x (= 40) and y (= 20) and trade y to get x.
ANS: c
 Chapter 10: General Equilibrium and Welfare 7

28. Suppose a man and a woman are in love and care for the other’s happiness as well as their
own consumption.

Suppose they have 100 units of consumption to distribute, they will maximize the joint
happiness ( ) where
a. ;
b. ;
c. ;
d. ;
ANS: d

29. Suppose a man and a woman are in love and care for the other’s happiness as well as their
own consumption. Suppose the man is more selfish than the woman
UM = CM2/3 UW1/3
UW = CW1/2 UM1/2
They will maximize the joint happiness ( ) where
a. ;
b. ;
c. 50 < < 100; 0 < < 50
d. 50 < < 100; 0 < < 50
ANS: c

30. Suppose a man and a woman are in love and care for the other’s happiness as well as their
own consumption. Suppose the woman is more selfish than the woman
UM = CM1/2 UW1/2
UW = CW2/3 UM1/3
They will maximize the joint happiness ( ) where
a. ;
b. ;
c. 50 < < 100; 0 < < 50
d. 50 < < 100; 0 < < 50
ANS: d