Scenario 16.1: Irrespective of the Amount of Cheese Doodles and Pretzels That

question 78

Multiple Choice

Scenario 16.1:
Irrespective of the amount of cheese doodles and pretzels that Sam consumes, his marginal rate of substitution of cheese doodles for pretzels is 2. Also, irrespective of the amount of cheese doodles and pretzels that Sally consumes, her marginal rate of substitution of cheese doodles for pretzels is 3.
-Refer to Scenario 16.1. Initially Sam and Sally are allocated 10 cheese doodles and 10 pretzels each. Which of the following statements are TRUE?

• A) The initial allocation is Pareto optimal as it is equitable.
• B) The initial allocation is Pareto optimal as Sally and Sam have equal amounts of both goods.
• C) The allocation is not Pareto optimal. An allocation that gave Sam all of the cheese doodles and Sally all of the pretzels would make both of them better off.
• D) The allocation is not Pareto optimal. An allocation that gave Sam four of the cheese doodles and sixteen of the pretzels (leaving Sally the rest) would make both of them better off.

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Definitions:

Money Supply

The total quantity of money available in the economy at a given time, including currency, deposits, and other liquid assets.

Required Reserve Ratio

The proportion of deposits that banks are required to hold in reserve and not lend out.

Required Reserve Ratio

The fraction of deposits that banks must hold in reserve, either in their vaults or with the central bank, to ensure bank liquidity.

Federal Funds Market

A financial market that allows banks to borrow or lend excess reserves to one another, usually on an overnight basis.