1. If Jaxson’s consuming goods x and y where mrs>mrt, he can increase his utility by a. decreasing x and increasing y. b. increasing x and decreasing y. c. doing nothing, because he is maximizing his...

1. If Jaxson’s consuming goods x and y where mrs>mrt, he can increase his utility by

a. decreasing x and increasing y.

b. increasing x and decreasing y.

c. doing nothing, because he is maximizing his utility.

d. none of the above.

2. Which of the following statements is not true about the pareto-improving lens?

1. Represents all the potential pareto-improvements over a player’s endowment
2. Conflicts of interest are completely eliminated in the allocations within the lens.
3. Represents the potential economic surplus to be gained from trade between the two players
4. Pareto-inefficient outcomes can exist within it

3. Which of the following statements is not true about the utility possibilities frontier

1. It shows utility levels that are attainable, given the utility functions of each player.
2. It’s a type of feasible frontier.
3. It shows the utility each player receives from all pareto-efficient outcomes.
4. It is constructed from the pareto-efficient curve.

4. What determines the extent of competition in a market?

1. How much the price decreases as more firms enter the market
2. How costly it is for a new firm to enter the market
3. The share of market sales each firm provides
4. All of the above

5. If A has TIOLI power in an exchange, which of the following are true?

a. Person A will capture most or all of the gains from trade.

b. Person B will lose utility compared to their initial endowment.

c. A Pareto-efficient outcome is assured.

d. Person B could gain utility if they agree to A’s offer.

6. Compared to a market with competitive firms, monopoly markets…

a. charge lower prices.

b. sell fewer units of product.

c. have lower consumer surplus.

d. all of the above.

Professor Saunders: 203

Spring 2021 Final Continued-page 2

Essays: Choose 3 of the 5 & limit your submission to 4 pages total. DO NOT copy the graphs in 3 and 4. Rather, answer those questions using the points that have labels. If you reference the text, you must cite the relevant page number, figures or math notes in your text where appropriate. Number answers consistently with the questions.

1. Fisher’s dilemma: Bekeh is a fisher whose utility function is given by:

, where is the amount of fish Bekeh catches, and is the time Bekeh spends fishing.

Provide reasoning and state whether the following statement is true or false:

Bekeh’s indifference curves are sloping downwards and convex to the origin

[Hint: Provide a rough sketch of the indifference curve with appropriate axes to go with your reasoning.]

1. Exchange between two Homo Economicus: The Edgeworth box below shows two Homo Economicus Sam and Tara, with initial endowment at point e.

What post exchange allocation would an Impartial Spectator propose and how would they determine this allocation?

3. Exchange with a First-Mover: The Edgeworth box below represents two Homo Economicus Sam and Tara, with initial endowment at point e.

Suppose Tara is the first mover, state what allocation she would propose if she had take-it-or-leave-it (TIOLI) power and why would she propose such an offer.

See p. 3

Professor Saunders: 203

Spring 2021 Final Continued-page 3

Essays, cont.

4. Explain whether and why you think the following statement is true, false or uncertain. Advice: If you choose to answer uncertain you must explain the conditions under which it would be true; and conditions where it would be false.

The Impartial Spectator, has the ability to reduce conflict and inefficiency, while reducing over-use of resources.

5. Exchange between two Homo Economicus: Ruth and Sophia have preferences for Lindt chocolate bars ( ) and cold-brew coffee ( are given by the utility functions:

and .

Their initial endowments are:

• Ruth has 10 Lindt bars ( ) and 12 bottles of cold-brew coffee ( )
• Sophia has 15 Lindt bars ( ) and 8 bottles of cold-brew coffee ( )

• Answer a & b; and choose 1 of (either) c & d. (Please: Do use the course formulas and methods, do not flip x & y. You will lose points if you do.)

a. Define participation constraint & Find the level of utility consistent with Ruth and Sophia’s participation constraints respectively.

b. What is Ruth’s marginal rate of substitution? What is Sophia’s marginal rate of substitution?

c. Calculate the values of Ruth’s and Sophia’s marginal rates of substitution at the initial endowment point. What do your answers suggest about Ruth and Sophia’s willingness to bargain?

d. Define the Pareto-Efficient Curve. Derive the equation for the Pareto-efficient curve for Ruth and Sophia. (Hint: derive PEC as in terms of ).