T5.1 Pareto efficiency
Select one answer
a. (I, I) is the unique Pareto efficient outcome.
b. Anil and Bala can Pareto improve by moving from (T, T) to (T, I).
c. (T, T) is the only Pareto inefficient outcome.
d. Anil and Bala will both be happy to move from the Pareto efficient (I, T) to the "fairer" Pareto efficient outcome (I, I).
Anil and Bala have the choice of using either Integrated Pest Control (IPC) or Terminator (T) to solve the problem of pest insects. The table below shows their payoffs
depending on their choice. The following diagram shows these possible outcomes on a graph. Based on the information above, which of the following is correct?
Section 5.2
T5.2 Coercion vs take-it-or-leave-it
Select one answer
a. Bruno can devise a take-it-or-leave-it offer under voluntary exchange such that he is just as well off as the best outcome under coercion.
b. Bruno can claim an economic rent of 5 out of the total surplus of 6 under his best voluntary exchange
outcome.
c. Angela will choose not to work if she is offered 2 bushels of grain for 16 hours of free time under voluntary exchange.
d. Bruno can increase his share by 2 bushels if he could coerce Angela to work 11 hours compared to under the voluntary exchange outcome.
The figure below shows Angela and Bruno’s feasible frontier, Angela’s biological survival constraint and her reservation indifference curve. You are also given that the total amount of grain produced is 8 bushels if Angela works for 8 hours and 10 bushels if she works for 11 hours. From this, we can conclude that:
Section 5.8
T5.3 The reservation indifference curve
Select one answer
a. Shifted higher.
b. The same.
c. Steeper and goes through Z.
d. The midpoint between the feasible frontier and the biological survival constraint.
The figure below shows Angela and Bruno’s feasible frontier, Angela’s biological survival constraint and her reservation indifference curve, when Angela would accept any offers strictly better than her reservation position of no work and 2 bushels of survival rations from the
government. Now consider the case where Angela cares about the fairness of distribution, such that she can reject an offer that she considers unfair and choose not to work.
In such a case Bruno will also receive no income. Then, compared to the reservation indifference curve depicted above, Angela’s new reservation indifference curve is:
Section 5.8
T5.4 Gini coefficient when sharing a surplus
Select all correct answers
a. A + B = 10,000.
b. Under the 50:50 sharing, A = 2,000.
c. Under the 75:25 sharing, A = 1,500.
d. The Gini coefficient under 75:25 is A/(A + B) = 750/5,000 = 0.15.
The figure below is the Lorenz curve when 90 farmers and 10 landowners share the crop 50:50 (the kinked solid line) and 75:25 (the kinked dotted line). Recall that the Gini coefficient is calculated by A/(A + B), where A is the area between the 45 degree line and the Lorenz curve, and B is the area below the Lorenz curve. Based on this information, which of the following are correct?
Section 5.12
