Consider an Edgeworth Box economy with two individuals and two goods and suppose that the tastes of both individuals are quasilinear in good 1.
a. Suppose initially that individual 1 has relatively little endowment of both good but the competitive equilibrium allocation has him consuming some of each. Illustrate such a competitive equilibrium.
b. Now suppose the government is able to redistribute the endowment in this economy (prior to any trade occurring). In order to achieve a more equitable outcome, the government redistributes some of good 1 from individual 2 to individual 1. Show such a redistribution in your Edgeworth Box.
c. Assume that both individuals continue to consume at an interior solution in the new equilibrium. How will the two individuals' consumption of good 1 change
from what it would have been without the redistribution?
d. Would your answer to (c) differ in any way if the government had instead redistributed good 2 from individual 2 to individual 1?
e. How would a sufficiently large redistribution alter your answer?
What will be an ideal response?
a.
b.
c. Consumption of good 1 would change for neither consumer.
d. No, it would not.
e. The answer would no longer hold when the redistribution is sufficiently large to cause individual 2 to end up at a corner solution. The first graph below illustrates that the previous slope of the budget cannot in this case arise from equilibrium prices -- which implies the prices have to change (as in the second panel).
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Economic growth in the United States has increased consistently since the 1950s.
Answer the following statement true (T) or false (F)
Perfectly inelastic demand is represented by a demand curve which is ________, and relatively inelastic demand is represented by a demand curve which is ________
A) upward sloping; horizontal B) horizontal; downward sloping C) downward sloping; vertical D) vertical; downward sloping
Everything else held constant, a decrease in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________
A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease
By announcing a higher inflation target, a central bank can
A) permanently increase real GDP and permanently decrease the unemployment rate. B) temporarily increase real GDP and permanently decrease the unemployment rate. C) permanently increase real GDP and temporarily decrease the unemployment rate. D) temporarily increase real GDP and temporarily decrease the unemployment rate.