Part A – Basics of Welfare Economics (Q1–Q6)
1. The main objective of Welfare Economics is to:
(A) Study price determination
(B) Analyze economic growth
(C) Evaluate economic efficiency and social welfare ✅
(D) Maximize private profit
Explanation:
Welfare Economics studies how resource allocation affects collective welfare — combining efficiency and equity concerns.
2. Welfare Economics is concerned with:
(A) Positive analysis
(B) Normative analysis ✅
(C) Statistical analysis
(D) Descriptive economics
Explanation:
It makes value judgments about what is “good” or “bad” for society — thus, it is a normative branch of economics.
3. The two key aspects of Welfare Economics are:
(A) Growth and investment
(B) Efficiency and equity ✅
(C) Production and employment
(D) Savings and investment
Explanation:
Welfare economics deals with efficient use of resources (efficiency) and fair distribution (equity).
4. Which of the following is NOT a condition for Pareto Optimality?
(A) Efficiency in exchange
(B) Efficiency in production
(C) Efficiency in product mix
(D) Equal income distribution ✅
Explanation:
Pareto efficiency concerns resource use, not equality — even unequal allocations can be Pareto optimal.
5. In welfare economics, value judgments are:
(A) Avoided completely
(B) Necessary for social welfare comparisons ✅
(C) Not allowed in any case
(D) Based only on money
Explanation:
Value judgments are essential to define what society ought to prefer, especially in constructing a Social Welfare Function.
6. The welfare criterion that avoids interpersonal utility comparison is:
(A) Kaldor–Hicks
(B) Pareto criterion ✅
(C) Social welfare function
(D) Pigovian criterion
Explanation:
Pareto avoids comparing one person’s satisfaction with another — it only considers improvement without harm.
Part B – The Fundamental Theorems of Welfare Economics (Q7–Q17)
7. The First Fundamental Theorem of Welfare Economics states that:
(A) All efficient allocations are market equilibria
(B) Every competitive equilibrium is Pareto efficient ✅
(C) Monopoly ensures efficiency
(D) Redistribution increases welfare
Explanation:
Under perfect competition, equilibrium automatically leads to Pareto efficiency — that’s the first theorem.
8. The Second Fundamental Theorem states that:
(A) All Pareto efficient points are competitive equilibria after redistribution ✅
(B) Efficiency cannot coexist with equity
(C) Market equilibrium is always fair
(D) Government must fix prices
Explanation:
The second theorem shows that by redistributing initial endowments, any efficient point can be achieved through markets.
9. The First Welfare Theorem is based on the assumption of:
(A) Market imperfections
(B) Perfect competition ✅
(C) Monopoly power
(D) Price controls
Explanation:
It assumes perfectly competitive markets — with no externalities and perfect information.
10. The Second Welfare Theorem provides a theoretical justification for:
(A) Laissez-faire capitalism
(B) Redistributive policies ✅
(C) Fiscal deficit
(D) Monopoly regulation
Explanation:
It supports government redistribution to achieve desired equity, followed by free market functioning for efficiency.
11. According to the First Welfare Theorem:
(A) Markets always maximize social welfare
(B) Competitive equilibrium ensures Pareto efficiency ✅
(C) Monopoly markets are optimal
(D) Equity is automatically achieved
Explanation:
Competitive markets allocate resources efficiently, though they may not ensure fairness.
12. Pareto efficiency and market equilibrium coincide when:
(A) Market is imperfect
(B) Externalities exist
(C) Perfect competition prevails ✅
(D) Income is unequally distributed
Explanation:
Only under perfect competition does market equilibrium ensure Pareto optimality.
13. Which of the following is an assumption of both Welfare Theorems?
(A) Non-convex preferences
(B) Perfect competition ✅
(C) Increasing returns to scale
(D) Price rigidity
Explanation:
Both rely on perfect competition and convex preferences for efficiency.
14. The First Theorem of Welfare Economics links:
(A) Monopoly and fairness
(B) Competitive equilibrium and efficiency ✅
(C) Income distribution and taxation
(D) Growth and equity
Explanation:
It establishes that competitive market equilibrium results in a Pareto efficient allocation of resources.
15. The Second Theorem links:
(A) Redistribution and market equilibrium ✅
(B) Taxes and inefficiency
(C) Monopoly and price control
(D) Production and inflation
Explanation:
It demonstrates that redistribution of endowments can achieve any desired Pareto efficient point through markets.
16. The difference between the two theorems is that:
(A) The first is normative, the second positive
(B) The first is positive, the second normative ✅
(C) Both are purely descriptive
(D) Both are moral rules
Explanation:
The first describes (positive) how markets work; the second prescribes (normative) how redistribution can achieve fairness.
17. A limitation of the Second Welfare Theorem is that:
(A) It assumes lump-sum transfers are possible ✅
(B) It ignores competition
(C) It requires monopolies
(D) It forbids redistribution
Explanation:
The theorem assumes costless, distortion-free lump-sum transfers, which are unrealistic in practice.
Part C – The Social Welfare Function (SWF) (Q18–Q30)
18. The Social Welfare Function (SWF) was introduced by:
(A) Pareto
(B) Pigou
(C) Bergson ✅
(D) Hicks
Explanation:
Abram Bergson (1938) formulated the concept; Samuelson later refined it for modern welfare analysis.
19. The SWF expresses:
(A) Economic growth
(B) Aggregate income
(C) Society’s welfare as a function of individual utilities ✅
(D) Marginal productivity
Explanation:
It relates social welfare (W) to the utilities (U₁, U₂, …, Uₙ) of all individuals.
20. The SWF allows:
(A) No interpersonal utility comparison
(B) Explicit interpersonal utility comparisons ✅
(C) Only ordinal ranking
(D) Only money measurement
Explanation:
Unlike Pareto, SWF explicitly uses ethical or value judgments to compare utilities between individuals.
21. The SWF helps determine:
(A) The most efficient but unequal allocation
(B) The most preferred Pareto-efficient allocation ✅
(C) The richest individual’s welfare
(D) The producer’s surplus
Explanation:
Among many Pareto-efficient points, SWF selects the one that maximizes social welfare based on social values.
22. The Benthamite (Utilitarian) SWF maximizes:
(A) The welfare of the poorest
(B) The sum of individual utilities ✅
(C) The product of utilities
(D) The minimum utility
Explanation:
The utilitarian approach adds up all individuals’ utilities:
23. The Rawlsian (Max–Min) SWF focuses on:
(A) The richest group
(B) Average welfare
(C) Welfare of the worst-off individual ✅
(D) Total income
Explanation:
John Rawls emphasized justice and fairness — maximizing the welfare of the least advantaged person.
24. The Bernoulli–Nash (Multiplicative) SWF:
(A) Takes sum of utilities
(B) Takes product of utilities ✅
(C) Takes average utility
(D) Uses cardinal measures
Explanation:
It represents social welfare as a product:
ensuring balance between equality and efficiency.
25. In the SWF diagram, the point of tangency between the Utility Possibility Frontier (UPF) and a Social Indifference Curve (SIC) shows:
(A) Economic growth
(B) Maximum social welfare ✅
(C) Minimum social welfare
(D) Perfect equality
Explanation:
The highest attainable social indifference curve tangent to the UPF identifies the welfare-maximizing allocation.
26. The SWF includes:
(A) Only individual utilities
(B) Both individual utilities and social value judgments ✅
(C) Only economic output
(D) None of the above
Explanation:
It combines measurable individual welfare and ethical judgments about their relative importance.
27. According to Arrow’s Impossibility Theorem:
(A) A perfect social choice function cannot exist ✅
(B) The SWF is always unique
(C) Pareto efficiency ensures fairness
(D) Redistribution reduces welfare
Explanation:
Kenneth Arrow proved that no voting system can aggregate individual preferences into a consistent social ranking satisfying all fairness conditions.
28. Which of the following violates Arrow’s fairness conditions?
(A) Dictatorship ✅
(B) Non-comparability
(C) Ordinality
(D) Efficiency
Explanation:
Dictatorship violates the principle of collective decision-making, as one person’s preferences dominate all others.
29. A limitation of the SWF is that:
(A) It ignores equality
(B) It requires interpersonal utility comparisons ✅
(C) It cannot handle multiple goods
(D) It is purely positive
Explanation:
The SWF depends on subjective judgments comparing utilities between individuals, which is ethically debatable.
30. The relationship among the three welfare tools is best summarized as:
(A) Welfare Theorems define efficiency; SWF adds equity ✅
(B) SWF ensures market equilibrium
(C) Welfare Theorems replace SWF
(D) SWF and Theorems are independent
Explanation:
The First and Second Welfare Theorems define efficient outcomes, while the SWF introduces social value judgments to choose among them.