Equilibrium: Problem Set on Supply, Demand, and Price

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Test Version A

Mid-Term Assessment

ECON 30110

Microeconomics II

Time Allowed: 50 minutes

Instructions for Candidates

This exam counts for 30% of the Module Grade.
All questions carry equal marks.
Note there is NO negative marking
Correct answer is worth 1 mark.
No answer or more than one answer, will both receive a 0 mark. Incorrect answer will receive a 0 mark.
Attempt all 20 questions.
Shade in the box in the appropriate space with a HB pencil on the RESPONSE SHEET. Write the test version at the top of the RESPONSE SHEET
You may use the paper provided to make notes or calculations to help you.

Instructions for Invigilators
Foreign language/English dictionaries are permitted.
Non-Programmable Calculators are permitted
If two people in a pure exchange economy have identical utility functions, then they:

a) may want to trade if their marginal rates of substitution are different b) will want to trade if they are on the contract curve
c) will not want to trade if their consumption bundles are not Pareto-efficient d) will only want to trade if they are not at their endowment e) may want to trade if the price ratio is not equal to one

answer a

If MRSA is not equal to MRSB, the two consumers will be able to arrange a mutually beneficial trade. Mutually beneficial trade will not occur only when the allocation of resources among A and B is already efficient. In the case of our two-consumer economy, MRSA=MRSB indicates an efficient allocation of goods (on contract curve).

2. Suppose in a two-good (X and Y) two-person (Ann and Bob) exchange economy, the MRS for person A is YA/XA and the MRS for B is YB/XB. The total amount of X is 40 and the total amount of Y is 40. Ann has an initial endowment of 10 units of X and 30 of Y, while Bob has the remainder. This implies:

a) No trade will take place.
b) Ann will give some of Y to Bob in exchange for X.
c) Ann will give some of X to Bob in exchange for Y.
d) Ann will give some of X and Y to Bob.
e) There is no enough information to make any predictions

Answer b:
MRSA = 30/10 = 3 Ann will give 3Y for 1X (or 1Y for 1/3X) MRSB = 10/30 = 1/3 .... Bob will give 1Y for 3X (or 1X for 1/3Y) Ann will trade Y for X (gives 1Y for min 1/3X and Bob accepts ..... in exchange for 1 Y will give up to 3X)

3. An Edgeworth Box is shown for individuals A and B, along with the contract curve.

Which of the allocations b through i can be reached through free trade from “a”, and once they have been reached no further mutually beneficial trade is possible?

a) Allocations b, e and f only
b) Allocations c, i and f only
c) Allocations d, c, i, g and h only
d) Allocations c and i only
e) None of these

Answer: d
Given endowment a, only points within the lens shaped area are mutually beneficial, or pareto superior (so points c, i and f). That is to say, any point outside of this lens would result in at least one of the individuals being worse off compared with point a. However, at only the points on the contract curve illustrate outcomes that are pareto efficient – where the indifference curves are just tangent (MRS of A and B are equal). That is to say, pareto efficiency means that no one can be made better off without someone else being made worse off. So all the gains from trade are exhausted and no further mutually beneficial trade is possible. (Point f is not on the contract curve, represents a case where MRS of A and B are different, and hence a case where further mutually beneficial trade is possible.)

4. An Edgeworth Box is shown for individuals A and B. The endowment point E represents the initial allocation of the goods X and Y. A price line is shown passing through points E, A and B, representing a given price ratio of –PX/PY.

At this given price ratio, which of the following statements is...
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