Intermediate Microeconomics and Its Application 11th Edition Nicholson Solutions Manual
Intermediate Microeconomics and Its Application 11th Edition Nicholson Solutions Manual
Intermediate Microeconomics and Its Application 11th Edition Nicholson Solutions Manual
com
https://testbankfan.com/product/intermediate-microeconomics-
and-its-application-11th-edition-nicholson-solutions-manual/
OR CLICK BUTTON
DOWLOAD NOW
https://testbankfan.com/product/intermediate-microeconomics-and-
its-application-11th-edition-nicholson-test-bank/
https://testbankfan.com/product/intermediate-microeconomics-and-
its-application-12th-edition-nicholson-solutions-manual/
https://testbankfan.com/product/intermediate-microeconomics-and-
its-application-12th-edition-nicholson-test-bank/
https://testbankfan.com/product/microeconomic-theory-basic-
principles-and-extensions-11th-edition-nicholson-solutions-
manual/
Calculus and Its Applications 11th Edition Bittinger
Solutions Manual
https://testbankfan.com/product/calculus-and-its-
applications-11th-edition-bittinger-solutions-manual/
https://testbankfan.com/product/intermediate-microeconomics-1st-
edition-mochrie-solutions-manual/
https://testbankfan.com/product/microeconomic-theory-basic-
principles-and-extensions-11th-edition-nicholson-test-bank/
https://testbankfan.com/product/business-its-legal-ethical-and-
global-environment-11th-edition-jennings-solutions-manual/
https://testbankfan.com/product/workouts-in-intermediate-
microeconomics-9th-edition-varian-solutions-manual/
CHAPTER 10
General Equilibrium and
Welfare
A. Summary
This chapter provides a very elementary introduction to general equilibrium
theory. It begins by showing why taking a general equilibrium approach may
be necessary to address some important economic questions and then pro-
ceeds to build a simply model of two markets. That model (drawn primarily
from the graphical approach to international trade theory) generalizes “sup-
ply” by using the production possibility frontier and “demand” by using a
typical person’s indifference curve. An advantage of this approach is to
stress that the economic “problem” is how to make the best (utility-
maximizing) use of scarce resources.
The middle portion of the chapter is devoted to showing the “first theo-
rem of welfare economics” (that perfectly competitive prices, under certain
circumstances, yield economic efficiency). Again this is done using the pro-
duction possibility frontier and indifference curves to show how the opera-
tions of markets cause the economy to hone in on the efficient point.
Reasons why the first theorem may fail are discussed in the third section
of the chapter. Subjects given very brief treatment include: (1) Imperfect
competition; (2) Externalities; (3) Public goods; and (4) Imperfect infor-
mation. Each of these topics is covered in considerable detail in later chap-
ters. The discussion here also includes a brief discussion of equity and of
how goals of equity and efficiency may sometime (but by no means always)
be in conflict. The Edgeworth Box Diagram is the primary tool used for this
purpose.
The chapter concludes with a brief discussion of how money enters into
general equilibrium models. The main goals here are: (1) to introduce the
“classical dichotomy” between monetary and real sectors; and (2) to illustrate
the notion of fiat money and why this innovation has important economic
implications.
1
2 Chapter 10: General Equilibrium and Welfare
b. See Graph
c. The production possibility frontier is the set of food and cloth outputs that sat-
isfy both constraints (see graph).
d. The frontier is concave because the two goods use differing factor proportions.
The slope changes as a different input becomes the binding constraint.
e. The constraints intersect at F = 50. For F < 50 the slope of the frontier is -1.
P
Hence, in this range, F = 1 . For 50 < F < 75 the slope of the frontier is -2
PC
P
(because land is the binding constraint). In this range therefore F = 2 .
PC
PF 5
f. With these preferences, = .
PC 4
g. Any price ratio between 1.0 and 2.0 will cause production to occur at the kink
in the frontier.
h. This capital constraint lies always outside the previous production possibility
frontier. It will not therefore affect any of the calculations earlier in this prob-
lem.
2 2
b. If Y = 2X, X + 2(2X) = 900.
2
9X = 900; X = 10, Y = 20. This point is shown on the frontier in part a.
c. If X = 9 on the production possibility frontier,
Y = 819 / 2 = 20.24
Given H = 16, U = 4F¼ C¼ and we know that optimality will require C = F since the
goods enter both the utility function and the production possibility frontier symmetri-
2
cally. Since C = F, have 2C = 8 or C = F = 2. Utility = 4 2.
10.5 a. Given the production conditions, the production possibility frontier will be a
straight line with slope - 3/2. Hence the price ratio in this economy must be
PX 3 X Y
= . The equation for the frontier is + = 20 .
PY 2 2 3
3 5 8
b. Using the hint, X S = XJ = XT =
PX PX PX
12
Similarly YT = . Substituting these into the equation for the frontier and us-
PY
2P 4 4 10 1 1
ing the fact that PY = X yields + = = 20 PX = ; PY = . Notice
3 Px PY PX 2 3
how setting the wage here also sets the absolute price level.
Chapter 10: General Equilibrium and Welfare 5
c. With these prices, total demand for X is 16, total demand for Y is 36. Hence 12
hours of labor must be devoted to Y production, 8 hours to X.
10.6 a. For region A the production possibility frontier is X A2 + YA2 = 100 . For region
B it is X B2 + YB2 = 25 . Hence the frontiers are concentric circles with radius 10
for A and 5 for B.
b. Production in both regions must have the same slope of the production possi-
bility frontier. In this case that means that the ratio X/Y must be the same in
both regions – production must take place along a ray through the origin.
c. The geometry of this situation suggests that for efficiency
X A = 2 X B YA = 2YB . Hence X T = 3 X B YT = 3YB and the frontier is given
by X T2 + YT2 = 9( X B2 + YB2 ) = 225 . If X T = 12 YT = 9 .
10.7 a. U1 = 10 U 2 = 5 .
F2
b. F1 = which implies F1 = 40 F2 = 160 .
4
c. The allocation in part a achieves this result --
F1 = F2 = 100 U1 = 10 U 2 = 5 .
d. A natural suggestion would be to maximize the sum of utilities. This would
1 1
require that marginal utilities be equal. Because MU1 = MU 2 =
2 F1 4 F2
equality of marginal utilities requires F1 = 4F2 F1 = 160; F2 = 40 -- a rather
unequal distribution. Still the sum of utilities is 15.8 – the largest possible.
With an equal allocation the sum of utilities, for example, is 15.0.
10.8 a. The total value of transactions is 20w. So, money supply = 60 = money de-
1 12 1 12
mand = 5w. So w = 12. PX = = 0.6 PY = = 0.4 .
2 10 3 10
b. If the money supply increases to 90, all wages and prices increase by 50 per-
cent: w = 18, PX = 0.9, PY = 0.6 . Relative prices and the overall allocation of
resources remain the same. Yes, this economy exhibits the classical dichoto-
my.
6 Chapter 10: General Equilibrium and Welfare
10.10 a. The preferences of Smith and Jones are shown in the figure. The only ex-
change ratio that can prevail is set by Jones’ preferences – 1C must trade for
0.75H. On the other hand, all efficient allocations must lie along the main di-
agonal of the box where, because of Smith’s preferences, C = 2H.
b. This is an equilibrium – the allocation lies on the contract curve and any trade
would make at least one person worse off.
c. Now the initial position is off the contract curve. Smith has 20“extra” H. If
Jones gets all the gains from trade because Smith gives these to him/her, utility
will increase from U J = 4(40) + 3(120) = 520 to U J = 4(60) + 3(120) = 600 . If
Smith gets all the gains from trade, the new equilibrium requires
4 H + 3C = 520 and C = 2 H . Hence, the equilibrium requires Jones to get H =
52, C = 104. Smith gets H = 48, C = 96 and is much better off than at the ini-
tial allocation. Smith may be able to enforce this equilibrium or, if he/she is
especially strong may in fact take everything.
Another random document with
no related content on Scribd:
What was Kenneth Fortescue doing that day? Was he
still living in that poor dismal neighbourhood? Was he still
denying himself in countless different ways for their sakes?
Or had he discovered the missing word in the letter? Had he
found the father who had cast him off as a child? Had he
been owned and reinstated in his rightful position? Perhaps
he had; perhaps now he was taking his place amongst the
great ones of the earth, and they would hear of him no
more.
Yes, there they were, her mother and Phyllis and Louis
Verner. It seemed too good to be true! What a drive home
that was, and how much they had to say to each other!
How beautiful it all looked! She had never thought that the
mountains were so high, or the Lake so lovely, or
Borrowdale so fine, or Castle Crag so magnificent. She had
loved them all from her childhood; but she thought she had
never fully appreciated them until that day.
"A letter for you, Marjorie," said Phyllis, who had gone
to meet the postman at the gate, "and it has such a black
border."
Then Mrs. St. Hellier went on to say that she had heard
from Colonel Verner that Miss Douglas was looking for
something of the kind, and she wanted to know whether
she would like her to name her to Lady Earlswood. She
thought she was at liberty to tell her that the remuneration
would be a handsome one; fifty pounds a year was the
amount mentioned by Lady Earlswood when she spoke to
her on the subject.
Then she went to the window. It was not yet dark, and
she could see hills and woods in every direction, whilst close
to the house were three long terraces, one above another,
from the various heights of which glorious views of the
surrounding country could be obtained. What a strange
contrast to the views from her bedroom window in Colwyn
House!
Marjorie laughed, and told her she did not think that
was possible.
"Marjorie, I've been horrid all day; why don't you tell
me so?"
"I don't mind one from you; but I do think it's a shame,
a horrible shame."
"Oh, I'm so sorry," said Marjorie. "I had not heard about
it."
"Oh, didn't you know? We were going to London to get
my trousseau the very week that this accident happened.
We were making all the plans about the wedding, and
actually had patterns in the house for choosing the
bridesmaids' dresses; and now here I am, lying helpless on
my back, and my wedding put off indefinitely. It is an awful
shame!"
"He doesn't like to see you suffer, Lady Violet. Oh, don't
ever think that! It is because He loves you He has let this
trouble come."
"I don't see much love in it! I suppose you mean that
God thinks I need punishing; but I've never done anything
to deserve it, and I do think it's a horrid shame!"
"I was thinking about the eagle's nest, and that you
were like one of the eaglets."
"What do you mean by that?"
"You know how the eagle makes her nest on the ledge
of some high rock, building it of sticks and briars, and then
lining it with moss, and hay, and wool, and soft feathers out
of her own breast."
"And then she lays her eggs, and the eaglets are
hatched, and they lie down in the soft nest, and are so cosy
that they never want to leave it. But, as they grow older,
the mother-bird wants them to learn to fly, that they may
be able to soar up with her towards the sun. So she hovers
over them and tries to persuade them to stretch their
wings; but the nest is far too cosy and snug for them to
want to leave it, and they nestle down again in the moss
and hay. But the mother knows all they will lose if they do
not learn to fly, so she rakes out the wool and feathers with
her strong beak, and makes the thorns and briars come to
the top. Then, when all the soft lining is gone, the young
birds shuffle about uncomfortably. The nest is not such a
nice place after all, and by degrees they creep to the edge
of it and sit there very miserably. And now the mother-bird
again tries to get them to fly, and they spread their small
wings, and she puts her great strong wing underneath
them, so that they may not fall, and soon they are soaring
with her into the glory above."
They were silent for some time after this, and then Lady
Violet said suddenly—
"Why?"
"But the doctor hopes you will be all right soon; doesn't
he?"
CHAPTER XXI
LORD KENMORE
Marjorie was very thankful for all this, and for the
letters from home, which were very cheering. Leila was
becoming quite strong again, and the money Marjorie was
earning, and which she had been able to send home at the
end of her first three months at Grantley Castle, had
enabled her mother to buy many much-needed things for
the household, and had considerably relieved the strain
consequent upon the loss of the insurance money.
But all that was over now, and she took the letter from
Lady Violet, when it was finished—the letter to him,—and
carried it down to the bag.
"LORD KENMORE,
"Rockcliffe Castle."
That, then, was his address. She saw that, but she saw
no more. What right had she to look at the letter to see his
address? She would put it in the letter-box at once. It was
nothing to her where he lived.
Once a wild hope darted across her mind that after all
she had jumped to a wrong conclusion. Perhaps Captain
Fortescue and Lord Kenmore were after all not the same;
and if so, could it be that he had found out where she was,
and had come to see whether she was happy at Grantley
Castle, just as once before he had come to Daisy Bank?
And so more than an hour went by, and then came the
sound of a bell, the bell of Lady Violet's sitting-room. This
bell rang upstairs in Collins' room, so that her mistress
could summon her whenever she required her. She heard
Collins come down and go into the next room, and soon
afterwards there came a knock at her bedroom door.
"No, not for ages; he has lost all his money, poor fellow,
and is as poor as a church mouse. I don't know what has
become of him."
CHAPTER XXII
MR. NORTHCOURT'S OPINION