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

CHAP. 14] GENERAL EQUILIBRIUM AND WELFARE ECONOMICS 321
4. The transformation curve is derived from (a) the consumption curve, (b) the utility-possibility curve, (c) the social
welfare function, or (d) the production contract curve.
Ans. (d) See Section 14.4.
5. The slope of the transformation curve is given by (a) MRT xy ,(b) MRS xy ,(c) MRTS LK ,or(d) all of the above.
Ans. (a) See Section 14.5.
6. In an economy of two individuals (A and B) and two commodities (X and Y), general equilibrium of production and
exchange occurs when (a) MRT xy ¼ P x /P y ,(b) MRS xy for A and B ¼ P x /P y ,(c) (MRS xy ) A ¼ (MRS xy ) B ,or
(d) MRT xy ¼ (MRS xy ) A ¼ (MRS xy ) B .
Ans. (d) See Section 14.6.
7. The distribution of two commodities between two individuals is said to be Pareto optimal if
(a)
(b)
(c)
one individual cannot be made better off without making the other worse off,
the individuals are on their consumption contract curve,
the individuals are on their utility-possibility curve, or
(d ) all of the above.
Ans. (d) Choice (a) is the definition of the Pareto optimal distribution of the two commodities between the two
individuals. The consumption contract curve is the locus of Pareto optimal points in consumption while the utilitypossibility
curve is derived from the consumption contract curve and thus it is also the locus of Pareto optimal points
of consumption.
8. In deriving the utility-possibility curve, we make interpersonal comparisons of utility. (a) Always, (b) never,
(c) sometimes, or (d) often.
Ans. (b) In drawing a utility-possibility curve, the u A scale is entirely independent from the u B scale. More specifically,
u A ¼ 200 is not necessarily greater than u B ¼ 100, although u A ¼ 200 . u A ¼ 100.
9. The locus of Pareto optimality in production and consumption is given by (a) the social welfare function, (b) the
utility-possibility curve, (c) the transformation curve, or (d) the grand utility-possibility curve.
Ans. (d) See Section 14.9.
10. An ethical or value judgment must be made in order to derive (a) the transformation curve, (b) the consumption
contract curve, (c) the grand utility-possibility curve, or (d) the social welfare function.
Ans. (d) See Section 14.10.
11. In a two-commodity (X and Y) and two-individual (A and B) economy, the maximum social welfare is reached at
(a) any point on the grand utility-possibility curve, (b) any point on the social welfare function, (c) the point where
the MRT xy ¼ MRS xy for A and B, or(d) the point of tangency of the grand utility-possibility curve with a social
welfare function.
Ans. (d) See point D 0 in Fig. 14-8.
12. Perfect competition leads to a point on the grand utility-possibility curve. (a) Always, (b) never, (c) sometimes, or
(d) we cannot say.
Ans. (c) Perfect competition leads to a point on the grand utility-possibility curve except when externalities are
present.