Econ 101 Winter 2010 Problem Set 1

Econ 101 Winter 2010 Problem Set 1 - Economics 101...

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Problem Set 1 January 14 & 15 University of Michigan Winter 2010 Economics 101 Microeconomics
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Econ 101.400 Winter 2010 Question One (a) Imagine people care only about one commodity. For want of a better name, call that commodity “money”. Given a quantity of money in the economy, how is it best allocated? If people in this fictitious world truly care only about money, and every individual prefers to have more money than less, describe all the Pareto efficient allocations of that resource. Of all potential ways to allocate resources, consider the allocation in which all people receive an equal amount of money. Is this allocation of resources Pareto efficient? Now consider the case where all the money in the world is held by one individual. Is this allocation Pareto efficient? Does the Pareto efficiency criterion favor relatively equal distributions of wealth over grossly inequitable ones? Do you think that Pareto efficiency alone can define for us the ideal distribution of resources in the economy? (b) Now imagine a world in which there are only two commodities of value to people: apples and bananas. To make things even simpler, suppose the economy is a tiny desert island inhabited only by two people, Xerxes and Yvonne. The available apples and bananas are to be allocated between Xerxes and Yvonne. Do you think that each having half the bananas and half the apples is a desirable allocation? Why or why not? More generally, do you think that attaining an equal distribution of resources is a valuable goal? (c) Imagine another two-person world in which there are only two commodities: Brussels sprouts and mangoes. Sid hates Brussels sprouts and likes mangoes. Nancy likes Brussels sprouts but absolutely adores mangoes. Describe all Pareto efficient allocation of these resources. (d) John Rawls advocated an alternative criterion to Pareto efficiency for evaluating resource allocation. Pareto efficiency promotes redistribution of resources when the re-allocation can make one person better off without harming another. Rawls advocated reallocating resources whenever such a reallocation would make the worst-off happier. Is it possible that some reallocation of resources would satisfy Rawls’ criterion but would not pass Pareto’s test? Is it possible that some reallocation of resources would pass Pareto’s test but would not pass Rawls’? Do you like Rawls’ idea? How do you think you can identify the “worst off” in any group?
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Econ 101.400
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This note was uploaded on 04/20/2010 for the course ECON 101 taught by Professor Gerson during the Winter '08 term at University of Michigan.

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Econ 101 Winter 2010 Problem Set 1 - Economics 101...

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