Property and Power (unit 5)

Question 1

Institutions

Answer 1

written and unwritten rules that govern how people interact, and how the economic rents are
distributed (institutions are evaluated based on efficiency and fairness)

Question 2

how do property owners have power?

Answer 2

Set the terms of the exchange (i.e. they make a take it-or-leave-it offer like the Proposer in an Ultimatum
game)

Bargain with multiple workers (i.e. when there is competition among responders to accept low offers)

Impose or threaten to impose costs on others (i.e. they can terminate the contract)

Question 3

pareto efficiency

Answer 3

no individual or group can be made better off without making someone else worse off.

Question 4

pareto improvement

Answer 4

a change from some
initial allocation of goods makes at least one person better off and
nobody else worse off

Question 5

difference between pareto efficiency and fairness

Answer 5

pareto efficiency is objectively determined but fairness is subjective and based on substantive and/or procedural assessment

Question 6

biological survival constraint

Answer 6

limitations imposed by biological needs (such as food, water, shelter, and energy) that must be met to survive and function effectively.

The curve represents the amount of grain Angela is willing to sacrifice for additional hours of free time to meet her survival needs

(It is MRS but it is NOT an indifference curve)

Angela does not get the same utility from working more and just meeting her survival needs as she would get from working less and just meeting her survival needs

Question 7

economic rent

Answer 7

represents earnings above the opportunity cost

Question 8

private property

Answer 8

the right to use and exclude others
from the use of something, as well as the right to sell it or its rights

Question 9

key difference between MRT and MRS in an example

Answer 9

MRT: The amount of grain that MUST be sacrificed for an additional hour of free time (Increases with free time)

MRS: The amount of grain that Angela is WILLING to sacrifice in order to meet her survival needs (Decreases with free time)

Question 10

technically feasible set (under coercion)

Answer 10

This refers to all outcomes that are physically or technologically possible, given available resources and production capabilities. It does not consider costs, prices, or willingness to trade

Question 11

economically feasible set (under voluntary exchange)

Answer 11

refers to all outcomes that are possible, given available resources and production capabilities and the worker’s willingness to exchange resources.

Question 12

reservation indifference curve

Answer 12

reservation indifference
curve (RIC) represents allocations
that someone values the same as their reservation option

Question 13

how is allocation chosen under coercion

Answer 13

Under coercion, the allocation chosen is where the slope
of the biological constraint
feasible frontier

Question 14

how is allocation chosen under voluntary exchange

Answer 14

joint surplus is maximized where the
slope of the reservation indifference curve equals the slope of the feasible frontier

Question 15

what happens to total surplus when both parties have to agree to the proposal?

Answer 15

It is lower (because you are working with an economically feasible set rather than a technically feasible one)

factors in preferences of thw worker that provide same utility as reservation option

Question 16

when is a pareto improvement possible in this model?

Answer 16

Whenever MRT ≠ MRS, a Pareto
improvement can be achieved at a
different level of production (when MRS=MRT, the greatest level of surplus is created)

Question 17

substantive justice

Answer 17

Focuses on the fairness of the final outcome of a decision-making process (e.g If two people commit the same crime, they should receive equal punishment under the law)

Question 18

procedural justice

Answer 18

Focuses on the fairness of the process used to make decisions (e.g Even if someone is guilty, they must receive a fair trial)

Question 19

Even when economic interactions are voluntary, property
owners may have bargaining power when they:

Answer 19

1. Set the terms of the exchange (i.e. they make a take
   it-or-leave-it offer like the Proposer in an Ultimatum
   game)
2. Bargain with multiple workers (i.e. when there is
   competition among responders to accept low offers)
3. Impose or threaten to impose consequences on others (i.e.
   they can terminate the contract)

Question 20

note: pareto efficiency does not indicate fairness or maximum profitability. E,g all allocations of screen time of 4 hours between a brother and sister are pareto efficient but only one allocation is fair.

Question 21

what does quasi linear mean?

Answer 21

This means that Angela values grain at some constant amount relative to free time, irrespective of how much grain she already has

Question 22

coercion vs bargaining (voluntary exchange)

Answer 22

• Under coercion, the allocation chosen is where the slope
  of the biological constraint
  equals the slope of the feasible frontier.
• Without coercion, joint surplus is maximized where the
  slope of the reservation indifference curve equals the slope of the feasible frontier.
• Total surplus is lower when both parties have to agree to
  the proposal