ps7 - ECON 1001 Tutorial 7 Q1) The concept of efficiency is...

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ECON 1001 Tutorial 7
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Q1)The concept of efficiency is illustrated by which of the following statements? A) The production of the good generates very little pollution. B) At equilibrium, all mutually beneficial transactions have taken place. C) The production of the good generates very few by- products. D) The consumption of the good produces very little waste. E) At disequilibrium, no mutually beneficial transactions have occurred. Ans: B
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In economics, efficiency denotes a state at which all potential gains from exchange have been captured. Recall that the definition of Pareto Optimality is “a state at which one cannot be made better off without making others worse off”. Any pollution or by-products related to exchange or production are taken into account. There can be little, or much pollution, as long as efficiency is attained.
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E.g. Hong Kong vs Africa HK is a place with terrible pollution, while Africa still has clean air. Is the situation regarded as ‘inefficient/ disequilibrium/ not optimal’ in Economics? Should we ‘balance/ equalize’ the pollution level between Africa and HK? The ans is ‘NO’ obviously, WHY? We chose to sacrifice the clean air in HK in exchange for the amazing economic development. Thus, econ surplus would definitely drops if we ‘move’ some of our industries to Africa. Therefore, B is the correct answer.
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Q2) A market equilibrium is only efficient when… A) Buyers and sellers each earn equal surplus from the transaction. B) Consumer surplus and producer surplus are both zero. C) All relevant costs, including those imposed on others, are accounted for. D) Income is distributed equitably. E) Firms are earning positive profits. Ans:C
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Options A ,B and E are not correct all the time. We will illustrate this in a diagram. P Q D S Efficient Consumer Surplus Producer Surplus In this case, CS and PS are not equal, but efficiency is reached. Therefore, A is wrong. B is also wrong as both CS and PS are positive. Recall that the Supply curve is the MC of production. Here, firms are earning profits. Hence E is not true.
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Option D is also not the right answer. When we talk about market equilibrium, income equality is not relevant. In fact, if income is determined by the demand and supply of labour… The wages of workers in different sectors would be different. This is because wages are determined by the demand and supply of labour in each individual sector. Hence, there is no basis to say income is distributed equitably when efficiency is attained.
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Option C is the correct answer. This is similar to what we have discussed in Question 1. When all relevant costs, including those imposed on others (e.g. pollution), are accounted for… The equilibrium determined by the market would be efficient. That is, one cannot be made better off without making others worse off.
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what is the total economic surplus? A)
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ps7 - ECON 1001 Tutorial 7 Q1) The concept of efficiency is...

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