CHAPTER 3 - Tools of Normative AnalysisMultiple-Choice Questions1. The slope of the production possibilities curve is thea) marginal rate of substitution.b) contract curve.c) offer curve.d) Engel curve.e) marginal rate of transformation.2. The First Fundamental Theorem of Welfare Economics requiresa) producers and consumers to be price takers.b) that there be a market for every commodity.c) that the economy operate at some point on the utility possibility curve.d) all of the above.3. Points outside the production possibility frontier area) producible.b) endowment points.c) consumer equilibrium points.d) unattainable.4. General equilibrium refers toa) examining markets without specific information.b) finding equilibrium from general information.c) pricing goods at their shadow price.d) all of the above.e) none of the above.5. The marginal rate of substitution isa) the slope of the utility curve.b) the slope of the contract curve.c) the slope of the utility possibilities curve.d) none of the above.6. Market failure can occur whena) monopoly power exists in the market.b) markets are missing.c) consumers can influence prices.d) all of the above.7. Partial equilibrium isa) exactly like general equilibrium.b) studying only the supply side of the market.c) studying individual markets.d) examining the demand side of the market.8. A public good isa) a good that the public must pay for.b) nonrival in consumption.c) more costly than a private good.d) paid for by the government.9. Merit goodsa) are provided for those who behave themselves and play nice.b) should be provided even if there is no demand for them.c) increase in costs along with demand.d) do none of the above.10. A social welfare functiona) is a function made by the Department of Welfare.b) is a function that shows that the utilities of society are incorporated into society’swell-being.c) can never be derived numerically.d) is all of the above.11. Movement from an inefficient allocation to an efficient allocation in the Edgeworth Boxwilla) increase the utility of all individuals.b) increase the utility of at least one individual, but may decrease the level of utilityof another person.c) increase the utility of one individual, but cannot decrease the utility of anyindividual.d) decrease the utility of all individuals.12. Points on the utility possibility frontier area) inefficient.b) points of incomplete preferences.c) not producible.d) Pareto.13. The Edgeworth Box shoulda) lie inside the PPF.b) lie partially inside the PPF.c) lie completely outside of the PPF.d) never touch the PPF.14. Pareto points in the Edgeworth Box area) found when utility curves are tangent.b) found when MRS are equal.c) found when one person cannot be made better off without making another personworse off.d) all of the above.e) none of the above.15. The Second Fundamental Theorem of Welfare Economics requiresa) that indifference curves be convex to the origin.b) that isoquants be concave to the origin.c) that there are no set prices for Pareto efficient allocations.d) that production be twice as large as consumption.e) all of the above.Discussion Questions1. Consider an Edgeworth economy where there are two citizens, Mr. Cortopassi andMs. Thomas. There are only two goods to be consumed in the economy, Beer and Pretzels. The total amount of Beer is 12 units. The total amount of Pretzels is 12 units.Answer the following: Suppose Mr. Cortopassi has utility for the two goods characterized as U C(B,P)=B+P. Ms. Thomas’s utility function is U T(B,P)=B+P. Identify the points that are Pareto efficient.2. Imagine a simple economy with only two people, Leroy and Percy. If the Social WelfareFunction is W = U L + U P, and the Utility Possibilities Frontier is UPF = U L + 2U P, what will be the societal optimum?3. If James has a utility curve characterized by the function given below, what is hismarginal rate of substitution between goods X and Y? U = 2X1/4Y3/4?4. Consider a simple exchange economy where the marginal rate of transformation betweentwo goods is greater than the marginal rate of substitution for the same goods. Can a Pareto equilibrium be derived?5. Suppose that a competitive firm’s marginal cost of producing output q is given byMC=2+2q. Assume that the market price of the firm’s product is $13.a) What level of output will the firm produce?b) What is the firm’s producer surplus?True/False/Uncertain Questions1. Welfare economics is concerned with individual desirability of alternative economicstates.2. The contract curve is the collection of points where utility curves are tangent in theEdgeworth box.3. The Utility Possibility Curve is derived from utility curves.4. When the First Fundamental Theorem of Welfare Ec onomics doesn’t hold, there is amarket failure.5. Externalities can be difficult to detect in open economies.6. Social indifference curves are the same as a Social Welfare Function.7. A utility possibilities frontier need not incorporate the utility of every individual.8. In equilibrium, the MRT should equal the MRS of all individuals.9. If the market does not allocate resources perfectly, the government can.10. Normative economics is more important than positive economics.Essay Questions1. Social welfare functions can be formed in many ways. They can be additive, meaningthat the all utilities curves are added together. They incorporate the idea of least-best, meaning that the utility of the person with the least is maximized. If you were a central planner for an economy, what type of social welfare function would you create?2. Merit goods have received considerable attention toward the end of this chapter. Canconcerts and other publicly provided services be rationalized using these ideas?3. Why might government intervention be needed in a market?。