General Equilibrium Theory: Interactive Learning Quizzes for Economics BSc

Question 1

The First Welfare Theorem in general equilibrium theory states that a competitive equilibrium:

Accepted Answer

Is Pareto efficient

Answer

Maximizes social welfare

Answer

Requires the absence of government intervention

Answer

Is always unique

Question 2

Which of the following is NOT a potential application of general equilibrium theory?

Accepted Answer

Predicting short-term stock market movements

Answer

Analyzing the effects of fiscal policy

Answer

Evaluating central bank policy measures

Answer

Conducting welfare economics research

Question 3

The Pareto frontier in general equilibrium theory represents:

Accepted Answer

The set of efficient allocations in a competitive equilibrium

Answer

The trade-offs between different goods in an economy

Answer

The optimal level of social welfare

Answer

The minimum level of production possible

Question 4

The Sonnenschein-Mantel-Debreu theorem implies that:

Accepted Answer

Any continuous utility function can be represented by a continuous demand function.

Answer

The Walrasian equilibrium is always unique.

Answer

The Second Welfare Theorem does not always hold.

Answer

The Arrow-Debreu model is only applicable to economies with a large number of agents.

Question 5

In the Arrow-Debreu model, the Walrasian auctioneer is responsible for:

Accepted Answer

Adjusting prices until markets clear

Answer

Distributing goods to consumers

Answer

Determining optimal production levels

Answer

Enforcing market rules

Question 6

In a perfectly competitive market, firms maximize profit where:

Accepted Answer

Marginal cost equals marginal revenue

Answer

Average cost equals average revenue

Answer

Total cost is minimized

Answer

Total revenue is maximized

Question 7

Within the Arrow-Debreu model, what is the primary purpose of the Walrasian auctioneer?

Accepted Answer

Determining equilibrium prices and coordinating resource allocation

Answer

Setting production quotas for each firm

Answer

Enforcing market regulations and preventing market failures

Answer

Distributing consumer goods based on individual preferences

Question 8

In the Arrow-Debreu model, how do externalities impact the efficiency of competitive equilibrium? Propose policy interventions to tackle these market failures.

Accepted Answer

Externalities cause inefficiency by creating a difference between private and social costs/benefits, resulting in over/under-production.

Accepted Answer

Pigouvian taxes and subsidies are effective policy tools to address negative and positive externalities, respectively.

Answer

Externalities are irrelevant in the Arrow-Debreu model, as they only affect perfectly competitive markets.

Answer

Government intervention is unnecessary for externalities, as the market will naturally adjust over time.

Question 9

Identify the key assumption of the Arrow-Debreu model of general equilibrium.

Accepted Answer

Perfect competition exists in all markets.

Answer

Externalities are prevalent throughout the economy.

Answer

Monopolies control the majority of markets.

Answer

Information is incomplete and asymmetric.

Question 10

State the First Welfare Theorem.

Accepted Answer

Under perfect competition, the equilibrium allocation of resources is Pareto efficient.

Answer

Competitive equilibrium results in the lowest possible production costs.

Answer

Competitive markets guarantee equal distribution of income.

Question 11

Describe the role of Walras' Law in the Arrow-Debreu model.

Accepted Answer

It ensures that the total demand for all goods equals the total supply at equilibrium prices.

Answer

It determines the specific equilibrium price for each individual good.

Answer

It guarantees the uniqueness of the equilibrium solution.

Question 12

What is the purpose of a production possibility frontier (PPF)?

Accepted Answer

It graphically represents the combinations of two goods that can be produced with given resources and technology.

Answer

It determines the optimal level of production for each good.

Answer

It calculates the equilibrium prices of goods in a market.

Question 13

Explain the significance of elasticity of substitution in production.

Accepted Answer

It measures the degree to which inputs can be substituted for each other in response to changes in their relative prices.

Answer

It determines the optimal ratio of inputs to use.

Answer

It is always equal to zero for perfect complements.

Question 14

Which factor can lead to an outward shift of the production possibility frontier?

Accepted Answer

Technological advancement.

Answer

Increase in the cost of production.

Answer

Reduction in the labor force.

Question 15

For a firm in perfect competition, what condition determines the optimal level of output?

Accepted Answer

Marginal cost is equal to the market price.

Answer

Total revenue is maximized.

Answer

Average cost is minimized.

Question 16

A social welfare function is a function that:

Accepted Answer

Ranks different social states according to their desirability.

Answer

Predicts the behavior of consumers and producers.

Answer

Determines the optimal level of government spending.

Question 17

In the Arrow-Debreu model, the excess demand for a good is:

Accepted Answer

The difference between the quantity demanded and the quantity supplied.

Answer

The quantity that consumers are willing to buy at a given price.

Answer

The difference between the price and the marginal cost of production.

Question 18

The second welfare theorem states that:

Accepted Answer

Any Pareto efficient allocation can be achieved through a competitive equilibrium with appropriate lump-sum taxes and subsidies.

Answer

All competitive equilibria are Pareto efficient.

Question 19

In a competitive equilibrium, the price of a good is equal to:

Accepted Answer

The marginal cost of production.

Answer

The average cost of production.

Answer

The supply of the good.

Answer

The demand for the good.

Question 20

Which of the following is a condition for a social welfare function to be Pareto efficient?

Accepted Answer

It must be non-decreasing in the utility of each individual.

Answer

It must be continuous.

Answer

It must be linear.

Question 21

The concept of general equilibrium refers to:

Accepted Answer

The simultaneous determination of prices and quantities in all markets.

Answer

The long-run equilibrium of an economy.

Answer

The equilibrium of a single market.

Question 22

A competitive market is characterized by:

Accepted Answer

Many buyers and sellers.

Answer

Government price controls.

Answer

High barriers to entry.

Answer

A single dominant firm.