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Problem_Set_11_Gains_From_Trade

Problem_Set_11_Gains_From_Trade - 313 Problems on Measuring...

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313 Problems on Measuring the Gains-From-Trade Problem 11.1. What is a Pareto efficient economic state? Problem 11.2. Suppose a cake is to be allocated between Juan, Jose and Juanita. Each of them always prefers more cake to less. (i) What are the Pareto efficient allocations of the cake? (ii) Give an example of a Pareto inefficient allocation of the cake? (iii) Is any of the Pareto efficient allocations “fair”? (iv) Is any of the Pareto efficient allocations “unfair”? (v) Is any inefficient allocation of the cake “fair”? Problem 11.3. This is an extension of Problem 11.2. We observe that Juan values the last piece of cake he has at $4, that Jose values his last piece of cake at $4, and that Juanita values her last piece of cake at $6. (i) Is the total value of the consumption of the cake maximized? (ii) Is the allocation of the cake economically efficient? (iii) If your answer to either part (i) or part (ii) is “No”, then what reallocation(s) would increase the total value of cake consumption and improve the economic effi- ciency of the allocation of the cake? Problem 11.4. This also is an extension of Problem 11.2. We observe that Juan values the last piece of cake he has at $5, that Jose values the last piece of cake he has at $5, and that Juanita values the last piece of cake she has at $5. (i) Is the total value of the consumption of the cake maximized? (ii) Is the allocation of the cake economically efficient? (iii) If your answer to either part (i) or part (ii) is “No”, then what reallocation(s) would increase the total value of cake consumption? (iv) If our three cake consumers instead acquired units of the cake by buying them in a perfectly competitive cake market, would the resulting allocation of the cake be economically efficient? Explain. Problem 11.5. In the problem set for Chapter 5 you were asked to think about a price ceiling imposed upon a market for gasoline. For your convenience the question is set out below. You should consult your earlier answers to this question or, if you prefer, you can work them out again. The last parts of the question are altered to help you to figure out the cost of the ceiling price regulation imposed upon the market. From time-to-time in the US we see prices made subject to regulations that do not permit prices to rise above a governmentally specified level. Let us think through the consequence of such price controls. As an example we will use the market for gasoline. Particularly, suppose that the market demand and market supply for gasoline are Q D = 100 - 20 p thousands of gallons and Q S = 30 p thousands of gallons
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314 CHAPTER 11. MEASURING THE GAINS-FROM-TRADE where p is the price per gallon of gasoline. (i) Draw yourself a clearly labeled diagram showing the market demand curve and the market supply curve. Where on the vertical axis does the market demand curve start and where on the horizontal axis does it end? Where does the market supply curve start on the vertical axis?
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