Second Fundamental Theorem of Welfare Economics a. Describe the theorem, making sure that you define clearly the terms used in the description (e.g. if you use the term “efficient” you have to describe what this means). b. Explain why the theorem implies that there is no intrinsic trade-off between efficiency and interpersonal equity. c. Demonstrate your argument using an Edgeworth box, making sure that you describe all the elements of the box appropriately.
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1. Second Fundamental Theorem of Welfare Economics
a. Describe the theorem, making sure that you define clearly the terms used in the
description (e.g. if you use the term “efficient” you have to describe what this means).
b. Explain why the theorem implies that there is no intrinsic trade-off between efficiency
and interpersonal equity.
c. Demonstrate your argument using an Edgeworth box, making sure that you describe all
the elements of the box appropriately.
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- Second Fundamental Theorem of Welfare Economics a. Describe the theorem, making sure that you define clearly the terms used in the description (e.g. if you use the term “efficient” you have to describe what this means). b. Explain why the theorem implies that there is no intrinsic trade-off between efficiency and interpersonal equity. c. Demonstrate your argument using an Edgeworth box, making sure that you describe all the elements of the box appropriately.5. If welfare as understood as preference satisfaction, it is virtually impossible to make interpersonal welfare comparisons. As a result, economists may adopt willingness to pay as a kind of shorthand for (or approximation of) preference satisfaction. Why might an economist think that willingness to pay is a useful approximation for preference satisfaction? Explain at least two common concerns with using willingness to pay in cost-benefit analysis.5. Sheila and Bruce are taking a canoe trip. Sheila brought 10 boxes of peanuts (x) and 15 bags of chips (y). Sheila's utility function is U*(x,y) = lnvx*+ Invy°. Bruce also brought 20 boxes of peanuts and 5 bags of chips. Bruce's utility function is UB(x.y) = min[x', y'I. a) Illustrate the endowment point and draw a sample set of indifference curves through the endowment point. b) If Sheila and Bruce trade what will be the pattern of mutually beneficial trade? c) If the terms of trade are the number of bags of chips (y) per box of peanuts (x) then what is the largest value that these terms can be for a mutually beneficial trade in this economy? d) Find one mutually beneficial trade where the terms of trade are 1 bag of chips (y) per 2 boxes of peanuts (x). Suppose that Sheila and Bruce set up two competitive markets for peanuts and chips. Below you will show that if the price of peanuts (x) is $1 and the price of chips (y) is $2 then the markets for both peanuts and chips will clear.…
- One of the following findings of the behavioral economics is widely adopted by the policy makers across the world Humans place greater welfare weights on A avoiding loss than experiencing equivalent gain. People prefer to cut economic loss more than their social loss. Policies aimed at enhancing people's gains C have been found to be more effective than the policies aimed at minimising people's losses Mankind behaves rationally irrespective of D their socio-psychological situations.2. The idea of assigning numerical values to determine a preference ordering over a set of ob- jects is not limited in application to commodity bundles. The Bill James Baseball Abstract argues that a baseball player's batting average is not an adequate measure of his offensive productivity. Batting averages treat singles just the same as extra base hits. Furthermore they do not give credit for "walks," although a walk is almost as good as a single. James argues that a double in two at-bats is better than a single, but not as good as two singles. To reflect these considerations, James proposes the following index, which he calls "runs created." Let A be the number of hits plus the number of walks that a batter gets in a season. Let B be the number of total bases that the batter gets in the season. (Thus, if a batter has S singles, W walks, D doubles, T triples, and H home runs, then A S + D +T+ H+W and B = S +W +2D +3T +4H.) Let N be the number of times the batter bats. Then his index…. Show that Cobb-Douglas preferences are homothetic preferences
- Which of the following is an example of a positiveexternality?a. Dev mows Myra’s lawn and is paid $100 for theservice.b. Dev’s lawnmower emits smoke that Myra’sneighbor Xavier has to breathe.c. Myra’s newly cut lawn makes her neighborhoodmore attractive.d. Myra’s neighbor Xavier offers to pay her if shekeeps her lawn well groomed.K Illustrate the logic of the endowment effect using a kinked indifference curve. Let the angle be greater than 90 degrees. Suppose that the prices change, so the slope of the budget line through the endowment changes Use the diagram to explain why an individual whose endowment point is at the kink will only trade from the endowment point if the price change is substantial Using the line drawing tool, graph a new budget line representing a price change such that the consumer's optimal bundle is unchanged. Label this line 1² Carefully follow the instructions above, and only draw the required object Y quantity of good y X₂ X, quantity of good x aTrue/false, no need to explain. (a) There is no perfect way to aggregate individual preferences to a single "social" preferences (b) “Before enacting a policy, try to put ourself in the shoes of those who will be negatively impacted mostly.” This sentence is best to summarise the Benthamite welfare function (c) If a person's utility is simply a function of her own consumption, and the welfare function is derived from individuals utility function, then we will not have consumption externalities. (d) An allocation cannot be both equitable and Pareto efficient.
- What is the difference between a Social Welfare Function and Social Choice Rule? Explain whether requiring a Social Choice Rule rather than a Social Welfare Func- tion successfully resolves the paradoxical results in social choice theory.Each day Paul, who is in third grade, eats lunch at school. He likes only Twinkies (t) and soda (s), andthese provide him a utility ofutility = U (t s) =square root (ts).a. If Twinkies cost $0.10 each and soda costs $0.25 per cup, how should Paul spend the $1 hismother gives him in order to maximize his utility?b. If the school tries to discourage Twinkie consumption by raising the price to $0.40, by howmuch will Paul’s mother have to increase his lunch allowance to provide him with the same levelof utility he received in part (a)?Adam Smith from the Classical School had introduced the “water-diamond paradox” in his Theory of Value. But he did not solve the paradox because he failed to understand the concept of utility. Explain by demonstrating relevant graph how this paradox was solved by William Stanley Jevons from the Marginalist School by using law of diminishing marginal utility.