EC1P1 - 3) Inequality and Poverty || Already Passed.
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EC1P1 - 3) Inequality and Poverty
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EC1P1 - 3) Inequality And Poverty
What is a pareto improvement? correct answers If changing allocation can make someone better of while not making someone else worse off. E.g. raising utility for some while not reducing it for others.
What is the Pareto optimum / a Pareto efficient allocation? correct answers The point where no ...
EC1P1 - 3) Inequality and Poverty || Already Passed.
What is a pareto improvement? correct answers If changing allocation can make someone better
of while not making someone else worse off. E.g. raising utility for some while not reducing it
for others.
What is the Pareto optimum / a Pareto efficient allocation? correct answers The point where no
one can be made better without making someone else worse off.
What is the marginal rate of substitution and its formula? correct answers Marginal rate of
substitution (MRS) across goods for an agent is the ratio of marginal utilities. Tells us how much
o the agent would need to receive to give up one unit of c. It is the rate at which the agent is
willing to trade c for o(θa/1-θa)(oa/ca)
How do you find the pareto efficiency condition? correct answers Equate the marginal rate of
substitution for 2 agents.
What is the price ratio between two goods? correct answers - Rate at which the market is willing
to trade between two goods.
E.g. The rate at which I can sell one good, get income and buy another good
After maximising utility, subject to budget constraints, what is MRS equal to? correct answers
The price ratio (Pc/Po)
What is MRS optimally equated to for an agent?Why? correct answers The MRS between 2
goods is equal to the price ratio between 2 goods in an optimal scenario.
This is the position where agents stop trading.
At the optimum, the rate at which I am WILLING to exchange goods is equal to the rate I can
actually exchange the goods in a market.
Otherwise, the consumer can gain utility by consuming more/less
What is first welfare theorem and how does this occur? Why may a pareto optimum not always
be ideal? correct answers - The market will deliver a pareto efficient outcome during an
exchange.
- This is because all consumers equate their MRS to the relative price, meaning everyone's MRS
is equal. Note - Pareto efficient optimum isn't always the social optimum. THere can be many
pareto optimum allocations but often few social optimums.
What did Smith and Hayek state? correct answers Smith - Don't need an omniscient planner
equating MRSs, people will get to a social optimum by doing what is best for them. By the
invisible hand this causes a Pareto optimum.
Hayek - The price system carries information such as MRS. Therefore all that needs to be done is
be a market and an unique price for people to trade. Once this is done, people adjust their MRS
and MRS is equated to reach the pareto optimum.
How can we judge inequality? How can we combat this correct answers - Lorenz curve
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