Economics 1: Semester 2, Worksheet 8.
1. An allocation is Pareto superior to another if at least one person is
better off, and no one is worse off. A situation is Pareto preferred
over another if it is Pareto superior. Essentially, one is chosen over
the other because it benefits at least one person without harming
others. An allocation is Pareto optimal if no further changes can
make someone better off without making someone else worse off.
2. A Pareto optimal allocation means no one can be made better off
without making someone else worse off, but that doesn’t guarantee
it aligns with what people value or perceive as fair. Voters may
prioritise fairness over pure efficiency in politics.
3. Yes, a Pareto efficient allocation can make someone worse off
compared to an allocation that is not Pareto efficient. Pareto
efficiency only ensures that no one can be made better off without
making someone else worse off, but it does not guarantee fairness
or a higher utility for all individuals.
4. Yes, it is possible to have a Pareto efficient allocation where
everyone is worse off compared to an allocation that is not Pareto
efficient. Pareto efficiency only ensures that no improvements can
be made without hurting someone, but it does not guarantee a high
overall level of well-being.
5. No, if we are at a Pareto efficient allocation, no one can be made
better off without making someone else worse off. By definition, all
possible gains from trade or reallocation have already been
exhausted.
6. No, in general equilibrium, there cannot be excess demand for every
good. Walras’ Law states that if there is excess demand in some
markets, there must be excess supply in others. In equilibrium,
supply and demand balance in all markets.
7. Efficiency in consumption requires that the marginal rate of
substitution is equal for all consumers because this ensures that no
further mutually beneficial trades are possible. If one consumer
values a good more than another, reallocating it can increase total
utility.
8. A rebuttal would argue that government intervention is justified
when markets fail.
9. Sure, taxes reduce efficiency but they also correct market failures. If
a tax targets a negative externality, it can improve efficiency by
aligning private costs with social costs. Taxes also fund public goods,
which markets often fail to provide efficiently.
10. ???
11. ???
12. Mr. Miller will consume 21 kg of tomatoes, while Mr. Gardner
will consume 7 kg. So, Mr. Miller consumes more tomatoes. Thus,
the equilibrium price ratio will be 1:2 (i.e., the price of bread is half
the price of tomatoes).
13. A straight-line contract curve occurs when preferences are
linear (perfect substitutes or fixed proportions). A curved contract
curve occurs with more looser preferences, such as Cobb-Douglas,
where the MRS is not constant.
14. ???
15. Crusoe and Friday can both produce food and clothing, but
their production capacities are different. Crusoe can make a
maximum of 5 units of food or 10 units of clothing, while Friday can
make 15 units of food or 10 units of clothing. Their production
possibilities are linear, meaning if they divide their time between
both activities, their outputs will adjust proportionally. For example,
if Crusoe spends half his time on food and half on clothing, he
produces 2.5 units of food and 5 units of clothing. The combined
production possibilities for both Crusoe and Friday, when added
together, form a straight line showing the total trade-off between
food and clothing the economy can produce, ranging from 20 units
of food (if they only produce food) to 20 units of clothing (if they
only produce clothing).
16. The production possibilities frontier shows the maximum
output combinations of two goods an economy can produce. The
production contract curve shows all the efficient allocations of those
goods between two people, where no one can be made better off
without making the other worse off. The contract curve is derived
from the PPF, because it represents the points where both people
are making the best use of the available resources, given the total
output shown on the PPF.
17. No, this economy is not efficient in production.
For the economy to be efficient in production, the marginal rate of
technical substitution between capital and labour should be the
same in both industries. This ensures that resources are allocated in
a way that maximises overall production without any waste.
Here, the MRTS in food production is 4, and in clothing production, it
is 2. Since these are not equal, resources are not being used
efficiently, and a reallocation could improve production. To improve
efficiency, we should reallocate some capital and labour from food
production to clothing production. This would increase the marginal
returns in clothing production and reduce inefficiencies, leading to a
Pareto improvement where at least one person is better off without
anyone being worse off.
