EC2A3 EXAM SET QUESTIONS AND CORRECT ANSWERS 2025.

EC2A3 EXAM SET QUESTIONS AND CORRECT ANSWERS
2025.




QUESTION: what is a market system? - ANSWER-a system for producing and allocating goods using price
signals




QUESTION: decentralization - ANSWER-people are not explicitly coordinated by anyone when they
produce/consume




QUESTION: self-interest - ANSWER-people do not care intrinsically about those who they are producing
for/trading with




QUESTION: partial vs general equilibrium - ANSWER-partial: the study of how equilibrium is determined
in one market in isolation

general: how demand and supply conditions interact in several markets to determine the prices of all
goods (and factor prices if there is production




QUESTION: role of the government in a market system - ANSWER-enforce property rights

enforce trades at agreed prices

in practice, there's no guarantee this happens.

,QUESTION: what does the core represent in an Edgeworth box? - ANSWER-all allocations which make
both parties better off in terms of their utility




QUESTION: how do you identify a Pareto efficient solution in an Edgeworth box? - ANSWER-when
there's a tangency between both peoples indifference curves i.e. when MRSa = MRSb




QUESTION: what is the contract curve? - ANSWER-the locus of all pareto efficient points




QUESTION: when is a market in equilibrium? - ANSWER-market X is in equilibrium if the amount A
wishes to buy of good X just equals the amount B wishes to sell of good X (and similarly for Y)




QUESTION: general equilibrium - ANSWER-described by a vector of prices and a consumption bundle for
each consumer (allocation), such that:

(i) every consumer maximises utility given prices, and

(ii) markets clear: the total demand for each commodity just equals the aggregate endowment.




QUESTION: Walras' Law - ANSWER-in a world with n markets, if n-1 are in equilibrium, so is the nth




QUESTION: how to solve for a general equilibrium in an exchange economy? - ANSWER-1. set a
numeraire and write down the budget constraint for each consumer.

2. write down each consumer's constrained optimisation problem.

, 3. use the Lagrangian method to find each consumer's (Marshallian or uncompensated) demand for each
good.

4. solve the market clearing condition(s) to find GCE price(s).

5. hence find the GCE allocation of the economy.

6. substitute the GCE consumption levels of each consumer into their utility function to find their welfare
in the GCE (we can compare to the initial allocation and see how they have gained from exchange)




QUESTION: Lagrangian function - ANSWER-L = U(X,Y) - λ(pxX + pyY - m)

(m = pxEx + pyEy where E is endowment)




QUESTION: conditions for existence of a GCE - ANSWER-the aggregate excess demand function should
be a continuous function

small changes in price should only result in small changes in aggregate demand (no jumps)

this condition is satsified if:

consumers have convex preferences, or consumers have discontinuous demand, but their demand is
small relative to the size of the market.




QUESTION: the first fundamental welfare theorem - ANSWER-the competitive market mechanism
results in a Pareto-efficient allocation




QUESTION: policy implications of first welfare theorem - ANSWER-theorem applies with many goods
and consumers