Chapter 16, General Equilibrium and Economic Efficiency Video Solutions, Microeconomics

Problem 1

Suppose gold $(G)$ and silver $(S)$ are substitutes for each other because both serve as hedges against inflation. Suppose also that the supplies of both are fixed in the short run $\left(Q_{G}=75 \text { and } Q_{S}=300\right)$ and that the demands for gold and silver are given by the following equations:
\[
P_{G}=975-Q_{G}+0.5 P_{S} \text { and } P_{S}=600-Q_{S}+0.5 P_{G}
\]
a. What are the equilibrium prices of gold and silver?
b. What if a new discovery of gold doubles the quantity supplied to $150 ?$ How will this discovery affect the prices of both gold and silver?

Ankit Gupta

Numerade Educator

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Problem 2

Using general equilibrium analysis, and taking into account feedback effects, analyze the following:
a. The likely effects of outbreaks of disease on chicken farms on the markets for chicken and pork.
b. The effects of increased taxes on airline tickets on travel to major tourist destinations such as Florida and California and on the hotel rooms in those destinations.

Oluwadamilola Ameobi

Numerade Educator

12:21

Problem 3

Jane has 3 liters of soft drinks and 9 sandwiches. Bob, on the other hand, has 8 liters of soft drinks and 4 sandwiches. With these endowments, Jane's marginal rate of substitution (MRS) of soft drinks for sandwiches is 4 and Bob's MRS is equal to 2 . Draw an Edgeworth box diagram to show whether this allocation of resources is efficient. If it is, explain why. If it is not, what exchanges will make both parties better off?

Oluwadamilola Ameobi

Numerade Educator

04:43

Problem 4

Jennifer and Drew consume orange juice and coffee. Jennifer's MRS of orange juice for coffee is 1 and Drew's MRS of orange juice for coffee is 3. If the price of orange juice is $\$ 2$ and the price of coffee is $\$ 3,$ which market is in excess demand? What do you expect to happen to the prices of the two goods?

Ankit Gupta

Numerade Educator

12:21

Problem 5

Fill in the missing information in the following tables. For each table, use the information provided to identify a possible trade. Then identify the final allocation and a possible value for the MRS at the efficient solution. (Note: There is more than one correct answer.) Illustrate your results using Edgeworth box diagrams.
a. Norman's MRS of food for clothing is 1 and Gina's MRS of food for clothing is 4:
b. Michael's MRS of food for clothing is $1 / 2$ and Kelly's MRS of food for clothing is 3

Oluwadamilola Ameobi

Numerade Educator

02:32

Problem 6

In the analysis of an exchange between two people, suppose both people have identical preferences. Will the contract curve be a straight line? Explain. Can you think of a counterexample?

Sanchit Jain

Numerade Educator

03:04

Problem 7

Give an example of conditions when the production possibilities frontier might not be concave.

Mihir Nayar

Numerade Educator

00:23

Problem 8

A monopsonist buys labor for less than the competitive wage. What type of inefficiency will this use of monopsony power cause? How would your answer change if the monopsonist in the labor market were also a monopolist in the output market?

Norman Atentar

Numerade Educator

05:00

Problem 9

The Acme Corporation produces $x$ and $y$ units of goods Alpha and Beta, respectively.
a. Use a production possibility frontier to explain how the willingness to produce more or less Alpha depends on the marginal rate of transformation of Alpha or Beta.
b. Consider two cases of production extremes:
(i) Acme produces zero units of Alpha initially, or
(ii) Acme produces zero units of Beta initially. If Acme always tries to stay on its production possibility frontier, describe the initial positions of cases
(i) and (ii). What happens as the Acme Corporation begins to produce both goods?

Eric Mockensturm

Numerade Educator

00:00

Problem 10

In the context of our analysis of the Edgeworth production box, suppose that a new invention changes a constant-returns-to-scale food production process into one that exhibits sharply increasing returns. How does this change affect the production contract curve?

Oluwadamilola Ameobi

Numerade Educator

04:24

Problem 11

Suppose that country $A$ and country $B$ both produce wine and cheese. Country $A$ has 800 units of available labor, while country $B$ has 600 units. Prior to trade, country $A$ consumes 40 pounds of cheese and 8 bottles of wine, and country $B$ consumes 30 pounds of cheese and 10 bottles of wine.
a. Which country has a comparative advantage in the production of each good? Explain.
b. Determine the production possibilities curve for each country, both graphically and algebraically. (Label the pretrade production point $P T$ and the post-trade point $P .)$
c. Given that 36 pounds of cheese and 9 bottles of wine are traded, label the post-trade consumption point $C$
d. Prove that both countries have gained from trade.
e. What is the slope of the price line at which trade occurs?

Erika Bustos

Numerade Educator