CHAPTER 15: THE “INVISIBLE HAND” AND THE FIRST WELFARE THEOREM

Question 1

What does quasilinear utility imply about ordinary and compensated demand

Answer 1

Ordinary (uncompensated) demand equals marginal willingness to pay (MWTP), which equals compensated demand

Question 2

How does income distribution affect market demand under quasilinear preferences

Answer 2

It doesn’t, market demand is invariant to income distrinbution

Question 3

What determines total quantity demanded in the market with quasilinear preferences

Answer 3

Only prices - not income distribution

Question 4

What happens to individual consumption of xb, under quasilinear tastes when income is redistributed

Answer 4

Each individual keeps buying the same amount of x1, only x2, consumption changes

Question 5

Why does total group consumption of x1 remain unchanged under quasilinear tastes

Answer 5

Because individual changes in x2 offset each other keeping total x1 demand constant (if no corner solutions)

Question 6

What does quasilinearity allow us to do when meddling groups of consumers

Answer 6

Treat the group as a single representative consumer with quasilinear tastes

Question 7

Why can we use a representative consumer to model market demand with quasilinear tastes

Answer 7

Because income distribution doesn’t affect market demand, so one customer’s demand represents the whole makrert

Question 8

How does the market demand curve related to the representative consumers demand curve

Answer 8

They share the same properties, like MWTP and consumer surplus

Question 9

What does quasiliniarity alllow us to do in modelling market demand

Answer 9

Treat the market as one representative consumer

Question 10

Why does market demand depend on under quasilinear preferences

Answer 10

Only total (aggregate) income not how its distributed

Question 11

What can the market demand curve (MWTP) be used to measure

Answer 11

Consumer surplus

Question 12

What other markets can this logic apply to besides goods

Answer 12

Labour and capital supply curves

Question 13

What does quasilinear tast in good x allows us to do with market demand

Answer 13

Treat it as if it comes from a single representative consumer

Question 14

Why can we use the market demand curve to measure consumer surplus over quasilinearity

Answer 14

Because there are no income effects, so demand. = MWTP

Question 15

What is the labour market equivalent of consumer surplus under quasilinear tastes

Answer 15

Worker surplus, if tastes are quasilinear in leisure

Question 16

Where does a firms producer surplus start

Answer 16

At the minimum point of average cost (AC)

Question 17

How does a firm earn additional producer surplus

Answer 17

By producing where price = marginal cost (MC), beyond the AC minimum

Question 18

What area represents producer surplus for a firm?

Answer 18

The area to the left of the firms supply curve

Question 19

Why can producer surplus be measured on the market supply curve

Answer 19

Because there are no income effects when aggregating across firms

Question 20

Where does labour demand come from in the short run

Answer 20

Front he marginal revenue product (MRP) of labour curve

Question 21

What is the break even in labour markets

Answer 21

The wage (wa) where the firm makes zero profit per worker

Question 22

What happenes when the wage is below the break even wage (w* < wa)

Answer 22

The firm earns profit per worker hour

Question 23

How is the producer surplus shown in the labour market

Answer 23

As the area under and to the left of the labour demand curve

Question 24

Can producer surplus be measures at the market level

Answer 24

Yes, it aggregates to the ares under the market labour demand curve

Question 25

Why is the quasilinearity assumption important in measuring market surplus

Answer 25

It removes income effects making consumers and worker surplus well defined and measureable

Question 26

Which surpluses rely on quasilinear tastes for clear meaurement

Answer 26

Consumer surplus and worker surplus

Question 27

What does a social planner maximise according to the first welfare theorem

Answer 27

Total surplus by equating marginal social benefit (MSB) and marginal social cost (MSC)

Question 28

In the first welfare theorem what equals marginal social cost (MSC)

Answer 28

Marginal production cost (MC)

Question 29

In the first welfare theorem what equals marginal social benefit (MSB)

Answer 29

MWTP of the representative consumer

Question 30

When is the social planner optimal output level reached

Answer 30

When MSB equals MSC, which matches the market output level

Question 31

Under what conditions does the first welfare theorem hold

Answer 31

Under certain conditions including beyond just quasilinear tastes

Question 32

How is surplus maximised for a normal good

Answer 32

At the intersection of supply and aggregate demand (total MWTP)

Question 33

What subtlety affects the social planners optimal output level

Answer 33

It depends on the current income distibuton

Question 34

What is a social planner in economic theory

Answer 34

An ideal, all knowing , and benevolent decision maker

Question 35

How do markets coordinate decisions without a social planner

Answer 35

Through prices that reflect individual circumstances

Question 36

Why doesn’t the market require benevolence

Answer 36

Because transactions are voluntary and based on mutual gain

Question 37

What kind of order emerges from decentralised market decisions

Answer 37

A spontaneous order

Question 38

What are the three key resource allocation questions in microeconomics

Answer 38

What and how much to produce How to produce it Who gets it

Question 39

How do markets use prices to allocate resources

Answer 39

Price send signals that guide production and input allocation based on demand

Question 40

What happens when demand for a product increases

Answer 40

Price rises, encouraging producers to supply more and inputs to shift towards that industry

Question 41

What does market efficiency mean

Answer 41

All mutually beneficial exchanges are exhausted through voluntary trade

Question 42

What are the key assumptions for the first welfare theorem to hold

Answer 42

No price distortions Clear property rights, no externalities No asymmetric information No market power

Question 43

What does the first welfare theore guarantee

Answer 43

Efficient market outcomes

Question 44

What does the first welfare theorem not address

Answer 44

Equity or fairness

Question 45

Why might non-market institutions like government be needed

Answer 45

To address issues beyond efficiency, such as fairness or when assumptions don’t hold.