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Midterm

Test 1 Solutions

7 Pages
135 Views

Department
Economics
Course Code
ECO205Y5
Professor
Michael H O

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UNIVERSITY OF TORONTO
DEPARTMENT OF ECONOMICS
MICROECONOMIC THEORY & APPLICATION
(ECO205Y5)
TEST 1 ± SOLUTIONS
NOVEMBER 8, 2010
TIME: 9 ± 10:30 AM (90 MINUTES)
VENUE: SE1143
IMPORTANT:
(i) This test should be answered in BALLPOINT PEN and you would surrender your rights
to request for re-assessment if you use pencil (except in diagrams).
(ii) Answer all questions in POINT FORM and only in the DESIGNATED PAGES.
(iii) Please ensure your HANDWRITING is LEGIBLE.
(iv) Do NOT SEPARATE any page from this test.
(v) NO AIDS allowed.
Student Name
Student ID#
Question
1
2
3
4
5
Total
Marks
12
20
20
30
18
100
Score
12
20
20
30
18
100
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Page 2 of 7
1. (i) Define Pareto criterion and Pareto optimality. (ii) The latest figure on Bill Gates net
worth in 2010 is $54 billion. If the US Government levies a tax of $1 billion on Bill Gates
and gives it to the poor, would this tax result in a Pareto-preferred state? Briefly explain
why and why not.
(i) 4 marks and (ii) 8 marks
(i) Pareto criterion ± in comparing two social states or allocations (E or F) such that E is Pareto
preferred to F if no one is worse off in E than in F, and if at least one person is better off in E
than in F.
Pareto optimality ± a social state is Pareto optimal if no other attainable social state is
Pareto-preferred to it.
(ii) Assume social state F is where Bill Gates has a net worth of $54 billion and without the $1
billion tax. The tax of $1 billion on his wealth and then the US Government transfers the
tax money to the poor results in social state E. Social state E could be a Pareto-preferred
state compared to social state F if Bill Gates is not being made worse off from paying the
$1 billion tax and at least one recipient of the transfer is made better off according to Pareto
criterion.
If Bill Gates feels being made worse off by the tax, then social state E is not Pareto-
preferred to social state F even millions of poor are made better off.
However, if Bill Gates feels good when he uses his money to help the poor and the more
poor people he helps, the happier he gets. If he believes the US Government can do a
better job in helping the poor than him such that more poor people can benefit when his
money is given out through the US Government than his own charity, then it would be a
win-win situation WKHPRUHSRRUSHRSOHFDQEHQHILWIURP%LOO*DWHV¶PRQH\DQGWKHPRUH
happier Bill Gates gets) and social state E is definitely Pareto-preferred to social state F.
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Description
U NIVERSITY OF T ORONTO D EPARTMENT OF E CONOMICS M ICROECONOMIC THEORY & A PPLICATION (ECO205Y5) TEST 1 SOLUTIONS NOVEMBER 8,2010 T IME:9 10:30AM(90 MINUTES) V ENUE: SE1143 IMPORTANT : (i)This test should be answered in BALLPOINT PEN and you would surrender your rights to request for re-assessment if you use pencil (except in diagrams). (iiAnswer all questions in POINT FORM and only in the DESIGNATED PAGES. (iv) Do NOT SEPARATE any page from this test.LE. (v)NO AIDS allowed. Student Name Student ID# Question 1 2 3 4 5 Total Marks 12 20 20 30 18 100 Score 12 20 20 30 18 100 Page 1 of 7 www.notesolution.com
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