Exam Question for Economic Analysis

Revision Questions for Economic Analysis.

Starred questions are more difficult.

Words typed in red are corrections to the original EARM document.

At the end of some questions I have provided some hints/solutions, they are typed in bold.

1. An allocation is efficient:

1. Only when all resources have been fully employed;
2. Only when Labor is fully employed;
3. Only when you cannot have more of one economic good without foregoing another;
4. Only when you cannot have more of at least one economic good;

             Answer = c

             This is the definition of Pareto Efficiency.

1. The following diagram shows the labor and capital constraints of an economy producing only two goods (x and y) using labor and capital only. Both labor and capital are needed in fixed proportions in the production of each unit of the two goods;

1. If the economy produced efficiently 150 units of x and the international price of x was 4y per x, it would specialize in x and produce 200 units of it;
2. If the economy produced efficiently 380 units of x and the international price of x was 1/2y per x, it would specialize in x and produce 200 units of it;
3. If the economy produced efficiently 150 units of x and the international price of x was 4y per x, it would specialize in y and produce 400 units of it;
4. If the economy produced efficiently 100 units of x and the international price of x was 2y per x, it would specialize in y and produce 400 units of it;

         Answer = a

 Find the value of (X,Y) for which both constraints bind, and then follow the reasoning      

 used for an almost identical question in the lectures.

                       [pic 1][pic 2][pic 3][pic 4][pic 5][pic 6][pic 7][pic 8][pic 9]

[pic 10][pic 11][pic 12][pic 13]

1. An increase in the price of all goods by the same proportion together with an equivalent increase in income will lead to:

1. Greater demand for all goods and individuals will be better off;
2. Smaller demand for all goods and individuals will be worse off;
3. No change at all but individuals will be better off;
4. No change at all;

            Answer = d

             There will not be any change in the budget constraint.

1. The slope of the demand curve for an inferior good is steeper than that of a normal good because:

1. Income and substitution effects augment each other;
2. The substitution effect for a normal good is greater than that for an inferior good;
3. The income effect of a normal good is smaller in magnitude ( absolute value) than the income effect of an inferior good;
4. Income and substitution effects offset each other;

            Answer = d

            e.g if the price rises then the substitution effect causes a reduction in demand.

                  However the good is inferior so the income effect will work in the opposite

                  direction. It mitigates the initial reduction. So for an inferior good the  

                  quantity response to a price change will be less than that for a normal good.