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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 valuesthe last piece of cake he has at $4, that Jose values his last piece of cake at $4, andthat 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 Juanvalues the last piece of cake he has at $5, that Jose values the last piece of cake hehas 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 themin a perfectly competitive cake market, would the resulting allocation of the cake beeconomically efficient? Explain.Problem 11.5.In the problem set for Chapter 5 you were asked to think about aprice ceiling imposed upon a market for gasoline. For your convenience the questionis set out below. You should consult your earlier answers to this question or, if youprefer, you can work them out again. The last parts of the question are altered to helpyou 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 notpermit prices to rise above a governmentally specified level. Let us think through theconsequence 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 areQD= 100-20pthousands of gallons andQS= 30pthousands of gallons

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