ps1-sol - Economics 321: Fall 2010 Problem Set 1 SOLUTIONS...

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Economics 321: Fall 2010 Helen Schneider Problem Set 1 SOLUTIONS Part I . 1. If the assumptions of the First Fundamental Theorem of Welfare Economics were never violated there would be no role for the government in a capitalistic society. Answer : False. The economic meaning of efficiency, i.e. Pareto efficiency, says little about economic equity. Even if the First Fundamental Theorem of Welfare Economics 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. 2. Suppose that everyone has a utility function that depends only on his or her income. Then the value of a utilitarian social welfare function is maximized when everyone has the same after-tax income. Answer : False. A utilitarian social welfare function says that social welfare is a function of the utilities of everyone in society. Even if all that utility depends on is income (so that incentive issues are not relevant), additional assumptions are needed to get the result. These include identical utility functions, no efficiency losses and diminishing marginal utility of income. 3. Demand curves for pure public goods satisfy the law of demand. Answer : True. Demand curves for public good are downward sloping: i.e. at higher prices consumers demand fewer public goods. Part II
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This note was uploaded on 10/25/2010 for the course ECO 321 taught by Professor Schneider during the Fall '10 term at University of Texas at Austin.

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ps1-sol - Economics 321: Fall 2010 Problem Set 1 SOLUTIONS...

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