STUDENTS SUCCESS
Revision Examination Tests
“Come all for this Greatness”
... 100% Correct Ans ...
EC2A3 EXAM TEST 2024-2025 ACTUAL EXAM
QUESTIONS AND CORRECT DETAILED ANSWERS
what is a market system?
Ans: a system for producing and allocating goods using price signals
Quiz decentralization
Ans: people are not explicitly coordinated by anyone when they produce/consume
Quiz self-interest
Ans: people do not care intrinsically about those who they are producing for/trading
with
Quiz partial vs general equilibrium
Ans: 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
Quiz role of the government in a market system
Ans: enforce property rights
enforce trades at agreed prices
in practice, there's no guarantee this happens.
Quiz what does the core represent in an Edgeworth box?
Ans: all allocations which make both parties better off in terms of their utility
Quiz how do you identify a Pareto efficient solution in an Edgeworth box?
Ans: when there's a tangency between both peoples indifference curves i.e. when
MRSa = MRSb
Quiz what is the contract curve?
,Ans: the locus of all pareto efficient points
Quiz when is a market in equilibrium?
Ans: 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)
Quiz general equilibrium
Ans: 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.
Quiz Walras' Law
Ans: in a world with n markets, if n-1 are in equilibrium, so is the nth
Quiz how to solve for a general equilibrium in an exchange economy?
Ans: 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)
Quiz Lagrangian function
Ans: L = U(X,Y) - λ(pxX + pyY - m)
(m = pxEx + pyEy where E is endowment)
Quiz conditions for existence of a GCE
Ans: 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.
Quiz the first fundamental welfare theorem
Ans: the competitive market mechanism results in a Pareto-efficient allocation
, Quiz policy implications of first welfare theorem
Ans: theorem applies with many goods and consumers
some implicit assumptions:
agents care only about their own consumption - no externalities
agents behave competitively - reasonable when there are many agents
consumer demand small relative to the market (implying aggregate demand is
continuous) so that equilibrium exists
profound implication: competitive market acts as a mechanism to ensure Pareto
efficiency, even with millions of agents. justification for competition policy,
environmental policy etc.
economy of informational requirements: consumers only need to know prices and
their own preferences
Quiz second fundamental welfare theorem
Ans: if preferences are convex, then any PE allocation can be achieved as a GCE
Quiz poliicy implications of the second welfare theorem
Ans: theorem applies with many goods and consumers
further assumption: convexity of preferences
profound implication: theoretical separation of efficiency and equity
lump sum transfers: redistribute wealth in a non- distortionary fashion and rely on
competitive markets for efficiency
prices reflect relative scarcity
Quiz GCE in a production economy
Ans: include labour supply in the utility function U(Xi,Yi,Li) and have income mi =
pja_ijLj
where Lj hours worked; a_ij goods generated per hour; sold on the market at pj
Quiz utility possibility frontier
Ans: options along the line are pareto efficient
Quiz Pareto criterion
Ans: a social outcome X' is Pareto superior to X if no-one finds X' worse than X and
at least one person finds it strictly better
Quiz drawbacks of the Pareto criterion
Ans: - provides an incomplete ordering of social outcomes: e.g. any two PE
outcomes are Pareto incomparable
- it also doesn't tell us how much better one situation is over another
- it doesn't help in deciding between two Pareto improving policies
- It says nothing about the distribution of welfare between individuals
Revision Examination Tests
“Come all for this Greatness”
... 100% Correct Ans ...
EC2A3 EXAM TEST 2024-2025 ACTUAL EXAM
QUESTIONS AND CORRECT DETAILED ANSWERS
what is a market system?
Ans: a system for producing and allocating goods using price signals
Quiz decentralization
Ans: people are not explicitly coordinated by anyone when they produce/consume
Quiz self-interest
Ans: people do not care intrinsically about those who they are producing for/trading
with
Quiz partial vs general equilibrium
Ans: 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
Quiz role of the government in a market system
Ans: enforce property rights
enforce trades at agreed prices
in practice, there's no guarantee this happens.
Quiz what does the core represent in an Edgeworth box?
Ans: all allocations which make both parties better off in terms of their utility
Quiz how do you identify a Pareto efficient solution in an Edgeworth box?
Ans: when there's a tangency between both peoples indifference curves i.e. when
MRSa = MRSb
Quiz what is the contract curve?
,Ans: the locus of all pareto efficient points
Quiz when is a market in equilibrium?
Ans: 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)
Quiz general equilibrium
Ans: 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.
Quiz Walras' Law
Ans: in a world with n markets, if n-1 are in equilibrium, so is the nth
Quiz how to solve for a general equilibrium in an exchange economy?
Ans: 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)
Quiz Lagrangian function
Ans: L = U(X,Y) - λ(pxX + pyY - m)
(m = pxEx + pyEy where E is endowment)
Quiz conditions for existence of a GCE
Ans: 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.
Quiz the first fundamental welfare theorem
Ans: the competitive market mechanism results in a Pareto-efficient allocation
, Quiz policy implications of first welfare theorem
Ans: theorem applies with many goods and consumers
some implicit assumptions:
agents care only about their own consumption - no externalities
agents behave competitively - reasonable when there are many agents
consumer demand small relative to the market (implying aggregate demand is
continuous) so that equilibrium exists
profound implication: competitive market acts as a mechanism to ensure Pareto
efficiency, even with millions of agents. justification for competition policy,
environmental policy etc.
economy of informational requirements: consumers only need to know prices and
their own preferences
Quiz second fundamental welfare theorem
Ans: if preferences are convex, then any PE allocation can be achieved as a GCE
Quiz poliicy implications of the second welfare theorem
Ans: theorem applies with many goods and consumers
further assumption: convexity of preferences
profound implication: theoretical separation of efficiency and equity
lump sum transfers: redistribute wealth in a non- distortionary fashion and rely on
competitive markets for efficiency
prices reflect relative scarcity
Quiz GCE in a production economy
Ans: include labour supply in the utility function U(Xi,Yi,Li) and have income mi =
pja_ijLj
where Lj hours worked; a_ij goods generated per hour; sold on the market at pj
Quiz utility possibility frontier
Ans: options along the line are pareto efficient
Quiz Pareto criterion
Ans: a social outcome X' is Pareto superior to X if no-one finds X' worse than X and
at least one person finds it strictly better
Quiz drawbacks of the Pareto criterion
Ans: - provides an incomplete ordering of social outcomes: e.g. any two PE
outcomes are Pareto incomparable
- it also doesn't tell us how much better one situation is over another
- it doesn't help in deciding between two Pareto improving policies
- It says nothing about the distribution of welfare between individuals
