Test Questions with Answers
Chapter 22. Equilibrium Theory.
Equilibrium. General Equilibrium. Welfare Economics. The Invisible Hand
Chapter 22 ― Question 1
Draw the equilibrium graph with constant rather than diminishing returns and explain all implications.
* You find two graphs below. Economists would draw the left one. There is no producer surplus. I think that this version is as unrealistic as the standard graph. In the right graph, the MC curve has been replaced by the ATC curve. Profit is price minus ATC, which is why the ATC curve is so important for producers. There is a producer surplus consisting of the gap between the ATC curve and the supply curve, in other words, it consists of a mark-up. The problem of economists with the second graph is that equilibrium is not reached by some automatic process. It is the result of a supplier decision on the size of the mark-up. The right diagram assumes that variable costs rise since fixed costs, the second component of ATC, always fall. This is not very realistic either.
Chapter 22 ― Question 2
Define allocative efficiency.
* Allocative efficiency means that total surplus has been maximised, that the mix of goods cannot be improved, that price equals marginal cost and marginal utility.
Chapter 22 ― Question 3
Define productive efficiency.
* Productive efficiency means that the economy is on the PPF, that the mix of factors cannot be improved, and that costs have been minimised.
Chapter 22 ― Question 4
If an industry is inefficient, what is the relationship between its supply curve and its marginal cost curve?
* The supply curve is left of and above the marginal cost curve.
Chapter 22 ― Question 5
A situation is Pareto optimal if
- all benefits exceed all costs
- marginal costs are falling
- any change helping some people will harm others
- there are no positive externalities
*C.
Chapter 22 ― Question 6
An economy is efficient when
- it produces the goods in which it has an absolute advantage
- it produces the goods in which it has a comparative advantage
- it produces the goods with the lowest opportunity costs
- it produces the maximum quantity that is attainable with its resources
*D. The economy is on the PPF. All other answers are traps; they relate to comparative advantage rather than efficiency. Answers B and C have the same meaning.
Chapter 22 ― Question 7
The compensation principle suggests that situation A is superior to situation B
A. if total output in A is higher
B. if total consumer surplus in A is higher
C. if the total gains equal the total losses
D. if the total gains exceed the total losses
*D. The winners are hypothetically able to compensate the losers.
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