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An economy produces outputs X and Y using inputs L and K. Which of the following is NOT required for
economic efficiency?
a. MRTSLK = MRSXY for all producers and consumers.
b. MRTXY = MRSXY for all producers and consumers.
c. MRSXY is equal for all consumers.
d. MRTSLK is equal for all producers.
e. None of the above is NOT required; all of these are required for economic efficiency.
Hours of Labor Required to Produce
Tomatoes
Beer
(1 lb.)
(1 gal.)
-------------------Guatemala
6
3
Mexico
2
2
The table above summarizes the production relationships in Mexico and Guatemala to produce
tomatoes and beer. Which of the following statements is correct?
a. There are potential gains from trade if: (1) Mexico specializes in the production of tomatoes, (2)
Guatemala specializes in the production of beer, and (3) Mexico trades tomatoes to Guatemala
for beer.
b. There are potential gains from trade if: (1) Mexico specializes in the production of beer, (2)
Guatemala specializes in the production of tomatoes, and (3) Mexico trades beer to Guatemala
for tomatoes.
c. There are no potential gains from trade because Mexico has an absolute advantage in the
production of beer and tomatoes.
d. There are no potential gains from trade because Guatemala has an absolute advantage in the
production of beer and tomatoes.
Irrespective of the amount of cheese doodles and pretzels that Sam consumes, his marginal rate of
substitution (MRS) of cheese doodles for pretzels is 2. Also, irrespective of the amount of cheese
doodles and pretzels that Sally consumes, her MRS of cheese doodles for pretzels is 3. Initially
Sam and Sally are allocated 10 cheese doodles and 10 pretzels each. Which of the following
statements are true?
a. The initial allocation is Pareto optimal as there are no possible trades that could make either
Sally or Sam better off.
b. The initial allocation is Pareto optimal as Sally and Sam have equal amounts of both goods.
c. The allocation is not Pareto optimal. An allocation that gave Sam all of the cheese doodles and
Sally all of the pretzels would make both of them better off.
d. The allocation is not Pareto optimal. An allocation that gave Sam four of the cheese doodles and
sixteen of the pretzels (leaving Sally the rest) would make both of them better off.
Which incentive scheme would simultaneously elicit accurate information about feasible plant
production levels and motivate managers to perform up to potential (in the following schemes, B is
the bonus payment, Q is actual plant output, and Qf is the manager's estimate of feasible output)?
a. B = 0.4Q
b. B = 0.4(Q - Qf)
c. B = 0.4Qf + 0.3(Q - Qf) if Q > Qf
d. B = 0.4Qf - 0.6(Q - Qf) if Q < Qf
d. B = 0.4Qf - 0.6(Q - Qf) if Q > Qf
f. B = 0.4Qf + 0.3(Q - Qf) if Q < Qf