Figure 10-9

question 304

Multiple Choice

Figure 10-9
-Refer to Figure 10-9, Panel (b) and Panel (c) . Which of the following is correct?

• A)A tax would move the market in Panel (b) and the market in Panel (c) closer to the socially optimal outcome.
• B)A subsidy would move the market in Panel (b) and the market in Panel (c) closer to the socially optimal outcome.
• C)A tax would move the market in Panel (b) closer to the socially optimal outcome, but a subsidy would move the market in Panel (c) closer to the socially optimal outcome.
• D)A subsidy would move the market in Panel (b) closer to the socially optimal outcome, but a tax would move the market in Panel (c) closer to the socially optimal outcome.

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Definitions:

Contract Curve

In economics, it refers to the locus of optimal points of allocation of resources between two parties under the constraints of their respective utility functions.

Pareto Optimal

A state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off.

Initial Endowment

The initial quantity of goods, services, assets, or resources that an individual, institution, or economy possesses.

Pareto Optimal

A situation where resources are distributed in such a manner that it's not feasible to rearrange them to benefit someone without adversely affecting at least another individual or preference standard.