MT2420KSpring08

# MT2420KSpring08 - Midterm 2, Spring 2008 1 Multiple Choice...

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Midterm 2 , Spring 2008 1 Multiple Choice (52) Q1 : Choose the correct statement about perfect competition. (a) It is a competition in which everybody has market power. (b) It is a competition in which strategic interaction between participants is unlimitedly strong. (c) It is a competition in which nobody can get better oF than his initial condition. (d) It is a competition in which everybody alone is negligible. (e) Unless an auctioneer exists, this concept doesn’t work. Q2 : What can you judge from the diagram below? Initial endowment is denoted by ω . (a) x is Pareto eﬃcient and individually rational. (b) x is not Pareto eﬃcient but individually rational. (c) x is Pareto eﬃcient but not individually rational. (d) x is neither Pareto eﬃcient or individually rational. O A O B x A 1 x A 2 x B 2 x A 2 ω x A’s ICs ✂✌ B’s ICs 1

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Q3 : Consider a 2-good exchange economy with 2 consumers. Consumer A’s preference is represented by u A ( x A 1 ,x A 2 ) = ln x A 1 + ln x A 2 . Consumer B’s preference is represented by u B ( x B 1 ,x B 2 ) = 2 ln x B 1 + ln x B 2 . Suppose the initial endowments are (5 , 7) for A and (10 , 8) for B, respectively. Then, in competitive equilibrium, (a) A sells good 1 and buys good 2, B buys good 1 and sells good 2. (b) A buys good 1 and sells good 2, B sells good 1 and buys good 2. (c) No trade occurs. (d) We cannot tell. Q4-5 :Consider a 2-period saving-borrowing economy with 2 consumers with no production . Consumer A has preference represented by u A ( x A 1 ,x A 2 )= ln x A 1 + β A ln x A 2 and an endowment stream ( ω A 1 A 2 ). Consumer B has preference represented by u B ( x B 1 ,x B 2 ) = ln x B 1 + β B ln x B 2 and an endow- ment stream ( ω B 1 B 2 ). Q4 : When β A B , ω A 1 B 1 and ω A 2 B 2 , (a) A saves and B borrows. (b) A borrows and B saves. (c) None of them saves or borrows. (d) We cannot tell. Q5 : When ω A 2 increases and the other parameters stay the same, (a) the interest rate rises. (b) the interest rate falls. (c) the interest rate stays the same.
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## This note was uploaded on 10/25/2010 for the course ECO 420K taught by Professor D during the Spring '10 term at University of Texas.

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MT2420KSpring08 - Midterm 2, Spring 2008 1 Multiple Choice...

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