PS 01.Key - ANSWERS TO PROBLEM SET 1 - Economics 335 J....

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ANSWERS TO PROBLEM SET 1 - Economics 335 J. Wissink Cornell University 1. Answer True, False, or Uncertain. Explain. a) False. The economic meaning of efficiency, i.e., Pareto efficiency, says little about economic equity. Even if the 1st-FTWE holds, the government may intervene in an economy to redistribute income and attain, what it believes to be, a more equitable final allocation of goods and services. It may also intervene with, for example, monetary and fiscal policy if it believes the current macroeconomic equilibrium is at an undesirable level of national output, income, employment, etc. It will also have a role in establishing property rights and enforcing them and contracts. b) False. What is true is that if an allocation is Pareto efficient then there are no other feasible allocations that Pareto dominate it. Note that every feasible allocation is not Pareto dominated by every Pareto efficient allocation. All feasible inefficient allocations, however, are dominated by some other feasible allocation. c) No. The first two do not imply the third. They are three independent conditions that will occur simultaneously if the allocation is Pareto efficient and all the appropriate "curves" are nicely behaved. d) False. If the initial endowment is Pareto efficient, then it alone is the core! 2. [Note: Depending on what you assumed, you may have come up with a slightly/vastly different set of answers. This was more of just a plain old thought question. What would matter most is if your discussion followed from your assumptions.] Ignoring the possibility of cannibalism, the only way anyone can survive is to be allowed the entire ration of food. If those who must die would prefer to die later rather than earlier, then the Rawlsian would insist that the rations
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PS 01.Key - ANSWERS TO PROBLEM SET 1 - Economics 335 J....

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