Instructions

• sections 5.1 to 5.7 and the lecture before you do PS6
• your answers need to be turned in individually each member of the group should turn in her/his answer
• answers should be recorded on the online scantron
• There are 10 questions, each worth 4 points.

1. Let’s take Anil’s and Bala’s example from Lecture 4. Recall that each is deciding whether to use an insecticide called terminator (T) or Integrated Pest Control (I).
   

   Figure 1.

   Based on Figure 1, you know that

• 1. outcome (I,I) dominates (T,T) #ans
• 2. outcome (T,T) dominates (I,I)
• 3. outcome (T,I) dominates (I,T)
• 4. outcome (I,T) dominates (T,I)

2. Figure 1 also says that

• 1. (T,T) is pareto optimal as there is no outcome such that both parties are better off.
• 2. Only (I,I) is the pareto optimal outcome as this is the best outcome for both.
• 3. There are more than 1 pareto optimal outcomes. #ans
• 4. Both a and d.

3. Outcomes (I,T), (I,I), and (T,I) are all pareto optimal outcomes as there is no other outcome that makes atleast one party better off without hurting the other.

• 1. True #ans
• 2. False

4. Which of the following statements about the outcome of an economic interaction is correct?

• 1. If the allocation is Pareto efficient, then you cannot make anyone better off without making someone else worse off. #ans
• 2. All participants are happy with what they get if the allocation is Pareto efficient.
• 3. There cannot be more than one Pareto-efficient outcome.
• 4. According to the Pareto criterion, a Pareto-efficient outcome is always better than an inefficient one.

5. Angela is a farmer, who produces a crop. Bruno then comes along and forces Angela to work for him. In this case, Bruno is ethically worse than a dictator. Angela needs to do what Bruno says (say Bruno is using a gun).

This resembles case 2 in the lecture. Consider the following figure.

Figure 2.

According to the model set up, are points to the left to Angela’s biological survival constraint feasible?

• 1. Yes, but this is not efficient.
• 2. No, since Angela would be getting more than Bruno in this set.
• 3. No, since Angela would not survive for points to the left of her survial constraint. #ans
• 4. both a and c

6. As Bruno has the ultimate bargaining power in Figure 2, he gets to assign what Angela gets. His pick is such that

• 1. Angela works 8 hours (free time of 16 hours) and he gets to keep 5.5 bushels.
• 2. Angela works 11 hours (free time of 13 hours) and he gets to keep 6 bushels and Angela gets 4.
• 3. MRS (slope of Angela’s biological constraint) is equal to the MRT (slope of the frontier)
• 4. both b and c #ans

7. If Bruno picks a point such that Angela has less than 13 hours of free time, MRS>MRT.

• 1. True #ans
• 2. False

8. Consider the next case for which the rule of law replaces the rule of force. Think of its Bruno’s land, but Bruno can no longer force Angela to work. Bruno can put forth an offer (part of the harvest needs to come to him). But Angela gets to decide whether she wants to work for him. The set up of this situation is given by the figure below.

Figure 3.

This figure has Angela’s reservation IC. Which of the following is FALSE?

• 1. All points on the reservation IC have the same value for Angela.
• 2. Points to the left of the reservation IC is not feasible because Angela would refuse to work.
• 3. Z is the only common point between the biological constraint and the reservation IC.
• 4. Points falling in the set between Angela’s biological constraint and reservation IC are economically feasible. #ans

9. Although Angela can refuse Bruno’s offer, Bruno still gets to pick the offer. In this sense, Bruno is similar to the proposer in the ultimatum game. Consider the following figure.

Figure 4.

According to the figure, Bruno picks

• 1. 16 hours of Angela’s free time for which he gets 9 bushels of grain.
• 2. 16 hours of Angela’s free time for which he gets 4.5 bushels of grain. #ans
• 3. 13 hours of Angela’s free time for which he gets 4 bushels of grain.
• 4. 13 hours of Angela’s free time for which he gets 12 bushels of grain.

10. Comparing the two cases in this problem set, given that Angela has a right to refuse Bruno’s offer, she will end up with higher hours of free time and more bushels of grain compared to the case when Bruno applies force.

• 1. True #ans
• 2. False