Question

1）Which of the following statements about a competitive equilibrium allocation are correct? [Select all correct answers].

A) It is the best possible allocation.

B) The total surplus from trade is maximized.

C）The allocation must be Pareto efficient.

D）No buyer’s or seller’s surplus can be increased without reducing someone else’s surplus.

2）According to the CORE-Econ reading, what is Pareto efficiency?

A）A set of strategies, one for each player in the game, such that each player’s strategy is a best response to the strategies chosen by everyone else.

B）An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good.

C）An allocation of property where there is no other feasible allocation in which at least one person could be made better off without making someone else worse off.

D）The effect of a tax on the welfare of buyers, sellers, or both.

3）According to the CORE-Econ reading, identify the three assumptions required for identifying Pareto efficient outcomes. [Select all correct answers].

A）A complete contract

B）No effect on others.

C）Price-taking

D）Fairness

Answer 1

• Question No:1

Competitive equilibrium , which is also known as Walrasian equilibrium is a concept of economic equilibrium. This concept helps to assess the market prices of products of various traders. Here, the prices will be so competitive and each and every trader has a fixed quantity which is a low level of quantity as compared to the aggregate quantity which is entering for trading in the market. Because of this process, the prices of each seller will have no impact on the market price.

Option(A)

Even though the competitive equilibrium enhances the total surplus, it cannot be said that the same is the best for each and every person in the market. If a person think that the allocation is unfair, then he can decline the same.

Hence, it cannot be said that this is the best allocation.

Thus, option (A) is incorrect.

Option (B)

Competitive equilibrium enhances the total surplus and can be said as the quality of competitive equilibrium.

Thus, option (B) is correct.

Option (C)

If a trader is concerned about their own product result without considering about other traders's result, then only a competitive equilibrium can said to be Pareto efficient. If a trader ever think or act like his income or advantage depends upon some other trader or traders, then the competitive equilibrium is not said to be Pareto efficient. Or if the allocation affects some one else in the market, then also it cannot be said as Pareto efficient.

Hence, it cannot be said that competitive equilibrium must be Pareto efficient. It is conditional.

Thus, option (C) is incorrect.

Option (D)

In competitive equilibrium, one trader's surplus will depend upon some other one's decline in surplus. Competitive equilibrium enhances the total surplus and can be said as the quality of competitive equilibrium.

Thus, option (D) is correct.

• Question No:2

As per Core-Econ reading, Pareto efficiency has been defined by famous economist named Vilfredo Pareto. According to him, Pareto efficiency is a type of allocation where any other alternative allocation is not there by which a person can be better without hurting any others or else an allocation which makes everyone beneficial.

Hence, option (C) is the correct answer.

• Question No:3

In order to identify Pareto efficient outcomes, there are some assumptions to judge the same.

Efficiency is the main base to gain something. It implies that no effect should be made on others negatively. Either everyone gains or one person will gain by not making others worse. A person should think that the respective allocation is fair. Then only, it can be said as Pareto efficient. Price-taking is also a basic assumption. In price-taking, the price opted by one person will not affect the price of others.

Hence, option (B), (C) and (D) are correct.