Pareto Efficiency Quiz

1) When the allocation of resources is Pareto efficient,

 (a) society is providing the greatest good to the greatest number. (b) no consumer would prefer someone else's consumption bundle to his or her own. (c) it is not feasible to make someone better off without making someone worse off. (d) it is feasible to make someone better off without making someone worse off.

2) If some allocation of resources is Pareto efficient, then that allocation satisfies:

 a) allocative efficiency and productive efficiency. b) allocative efficiency and distributive efficiency. c) productive efficiency and distributive efficiency. d) allocative efficiency, productive efficiency, and distributive efficiency.

First allocation

Second allocation

 A1 = 25 A2 = 25 B1 = 15 B2 = 15 MRS1AB = 8 MRS2AB = 3
 A1 = 65 A2 = 5 B1 = 85 B2 = 3 MRS1AB = 7 MRS2AB = 7

3) The tables above show two allocations of two commodities (labeled A and B) to two consumers (labeled 1 and 2). For example, B1 is the amount of good B assigned in each particular allocation to consumer 1. The tables also show the consumers' marginal rates of substitution at the consumption bundles they receive at each allocation.

 a) The first allocation satisfies distributive efficiency; the second allocation does not. b) The second allocation satisfies distributive efficiency; the first allocation does not. c) Both allocations satisfy distributive efficiency. d) Neither allocation satisfies distributive efficiency.

 4) The diagrams at right show possible allocations of a pumpkin pie among three consumers. Assuming that each consumer likes pumpkin pie and prefers larger slices to smaller ones: a) allocation 1 is Pareto efficient, but allocation 2 is not. b) allocation 1 is Pareto efficient, but allocation 3 is not. c) allocation 2 is more Pareto efficient than allocation 1. d) allocation 3 is more Pareto efficient than allocation 1.

5) When two commodities X and Y must be allocated among consumers, a necessary condition for distributive efficiency is that:

 a) all firms be price takers. b) all firms minimize cost. c) commodity X must be allocated to the consumers with the largest values of MRSXY. d) the marginal rates of substitution MRSXY for all consumers must be equal.

6) The necessary condition for allocative efficiency is that each commodity be produced in an amount that makes the marginal benefit to society of the last unit produced equal to the marginal cost to society of that last unit. The satisfaction of this condition in a market economy relies on the assumptions of:

 a) utility maximization, profit maximization, and perfect competition. b) utility maximization and profit maximization, but not perfect competition. c) profit maximization and perfect competition, but not utility maximization. d) utility maximization and perfect competition, but not profit maximization.

 7) The current consumption bundles of Abelard and Heloise are illustrated at right, with A denoting the quantity of apples and B denoting the quantity of bananas consumed by each. a) Both consumers will be better off if Abelard gives Heloise one apple and Heloise gives Abelard five bananas. b) Both consumers will be better off if Abelard gives Heloise four bananas and Heloise gives Abelard one apple. c) Both consumers will be better off if Abelard gives Heloise two apples and Heloise gives Abelard four bananas. d) It is impossible to make one consumer better off without making the other worse off.

8) The Fundamental Theorem of Welfare Economics:

 a) shows that the allocation of resources generated by a complete system of perfectly competitive markets results in all consumers attaining the same utility level. b) refers to the biblical observation that "the poor ye shall always have with you." c) implies that no intervention in the workings of markets can be justified on efficiency grounds. d) holds that the allocation of resources generated by a complete system of perfectly competitive markets is Pareto efficient.

9) If an economy operates on its production possibility curve, then the allocation of resources in that economy satisfies:
 a) allocative efficiency. b) distributive efficiency. c) Pareto efficiency. d) productive efficiency.

10) If a brother and sister return home from trick-or-treating on Halloween and engage in a series of voluntary trades of candy, we can conclude that:

 a) the initial allocation of candy between them was distributively inefficient. b) the initial allocation of candy between them was distributively efficient. c) their preferences must be different. d) the candy they collected around the neighborhood must have been different.