Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

320 GENERAL EQUILIBRIUM AND WELFARE ECONOMICS [CHAP. 14
General equilibrium of exchange The condition when the marginal rate of substitution (MRS) in consumption for the
two commodities is the same for both individuals.
General equilibrium of production The condition when the marginal rate of technical substitution (MRTS) of one
factor for another is the same in the production of both commodities.
General equilibrium of production and exchange The condition when the marginal rate of transformation between
two commodities is equal to the marginal rate of substitution consumption between the two commodities for each individual.
Grand utility-possibility curve
Maximum social welfare
curve.
The locus of points of Pareto optimum in production and exchange.
Is attained at the point where the grand utility-possibility curve is tangent to a social welfare
Nonexclusion The situation in which it is impossible or prohibitively expensive to confine the benefit or the consumption
of a public good to only those people paying for it.
Nonrival consumption The distinguishing characteristic of a public good, whereby its consumption by some individuals
does not reduce the amount available to others.
Pareto optimal The condition when production and distribution cannot be reorganized to increase the output of one
commodity or the utility of one individual without reducing the production of the other commodity or the utility of the
other individual.
Product transformation curve Shows the various combinations of two commodities that an economy can produce by
fully utilizing all its resources with the best technology available.
Production contract curve
Public good
others.
The locus of points where one producer’s isoquant is tangent to the other producer’s isoquant.
Goods and services for which consumption by some individuals does not reduce the amount available for
Slope of the transformation curve
Social welfare function
of satisfaction or welfare.
Utility-possibility curve
of exchange.
Welfare economics
optimal.
The marginal rate of transformation of one commodity for another in production.
Shows the various combinations of utilities of two individuals that give society the same level
Shows the various combinations of utility received by two individuals in general equilibrium
Studies the conditions under which the solution to a general equilibrium model can be said to be
Review Questions
1. In an economy of two individuals (A and B) and two commodities (X and Y), general equilibrium of exchange is
reached when (a) MRT xy ¼ MRS xy for A and B, (b) MRS xy ¼ P x /P y ,(c) (MRS xy ) A ¼ (MRS xy ) B ,or(d) all of the
above.
Ans. (c) See Section 14.2.
2. The locus of general equilibrium points of exchange in a two-individual, two-commodity economy is called (a) the
consumption contract curve, (b) the production contract curve, (c) the social welfare function, or (d) the transformation
curve.
Ans. (a) See Example 1 and Fig. 14-1.
3. In an economy of two commodities (X and Y) and two factors (L and K), general equilibrium of production
is reached when (a) MRTS LK ¼ P L /P K , (b) MRTS LK ¼ MRS xy , (c) MRT xy ¼ MRS xy , or (d) (MRTS LK ) x ¼
(MRTS LK ) y .
Ans. (d) See Section 14.3.