Part A – Fundamentals of General Equilibrium (Q1–Q10)
1. The general equilibrium approach was first developed by:
(A) Alfred Marshall (B) Léon Walras ✅ (C) Vilfredo Pareto (D) Adam Smith
Explanation:
Léon Walras introduced the concept of general equilibrium in his 1874 book Elements of Pure Economics. He used simultaneous equations to show how all markets in an economy reach equilibrium together.
2. The partial equilibrium analysis assumes:
(A) Interdependence of all markets
(B) Simultaneous equilibrium of all markets
(C) Other things remain constant ✅
(D) Constant returns to scale
Explanation:
Partial equilibrium (Marshallian) isolates one market at a time, assuming ceteris paribus — all other factors such as incomes, prices of related goods, and tastes remain constant.
3. General Equilibrium analysis considers:
(A) One market in isolation
(B) All interrelated markets simultaneously ✅
(C) Only factor markets
(D) Only goods markets
Explanation:
General equilibrium recognizes interdependence among all markets (goods and factors) and determines prices and quantities in all of them together.
4. Equality of demand and supply in all markets simultaneously is known as:
(A) Microeconomic equilibrium
(B) General equilibrium ✅
(C) Partial equilibrium
(D) Market failure
Explanation:
General equilibrium occurs when demand equals supply in every market of an economy at the same time.
5. The Walrasian system uses which mathematical method?
(A) Differential equations
(B) Simultaneous equations ✅
(C) Regression analysis
(D) Integral calculus
Explanation:
Walras modeled markets as a system of simultaneous equations, where all prices and quantities are determined together.
6. In Walrasian analysis, “unknowns” represent:
(A) Quantities only
(B) Prices only
(C) Prices and quantities of all commodities and factors ✅
(D) Profits and wages only
Explanation:
The Walrasian model includes as many unknowns (prices and quantities) as independent equations for all goods and factors in the system.
7. Walras’ Law states that:
(A) The sum of excess demands across markets equals zero ✅
(B) Total supply always exceeds demand
(C) Only one market can be in equilibrium
(D) Demand always exceeds supply
Explanation:
Walras’ Law implies that if n-1 markets are in equilibrium, the nth market must also be in equilibrium — the sum of excess demands times prices is always zero.
8. If all but one market are in equilibrium, then according to Walras’ Law:
(A) No equilibrium exists
(B) The last market must also be in equilibrium ✅
(C) Prices will diverge
(D) Supply exceeds demand
Explanation:
Because total value of excess demand is zero, equilibrium in all but one market automatically ensures equilibrium in the remaining market.
9. The existence of a general equilibrium solution requires:
(A) More unknowns than equations
(B) Equal number of independent equations and unknowns ✅
(C) Fewer equations than unknowns
(D) No mathematical relationship
Explanation:
A basic mathematical requirement for solvability of the Walrasian system is equality between the number of independent equations and the number of unknown variables.
10. The Arrow–Debreu model proved:
(A) Instability of equilibrium
(B) Existence of general equilibrium ✅
(C) Monopoly equilibrium
(D) Disequilibrium in markets
Explanation:
Kenneth Arrow and Gérard Debreu (1954) gave a rigorous proof that, under convex preferences and continuous production functions, a general equilibrium always exists.
Part B – Existence, Uniqueness & Stability (Q11–Q20)
11. The existence of equilibrium depends on:
(A) Equality of equations and unknowns
(B) Convex preferences and diminishing returns ✅
(C) Constant costs
(D) Increasing returns
Explanation:
Arrow–Debreu showed that general equilibrium exists if preferences are convex and production exhibits constant or diminishing returns.
12. Uniqueness of equilibrium means:
(A) Multiple equilibria
(B) Only one set of prices clears all markets ✅
(C) No solution
(D) Negative prices
Explanation:
Uniqueness ensures a single consistent price–quantity combination that balances all markets; otherwise, multiple equilibria can arise.
13. A stable equilibrium is one where:
(A) Disturbances push the system away
(B) The system returns to equilibrium after disturbance ✅
(C) Output stays fixed
(D) Price never changes
Explanation:
Stability means that self-correcting forces (supply and demand) restore equilibrium when disturbed — essential for market resilience.
14. The Cobweb theorem illustrates:
(A) Market failure
(B) Dynamic stability and instability ✅
(C) Monopoly behavior
(D) Welfare loss
Explanation:
The Cobweb theorem analyzes oscillations in price and output over time due to lagged supply responses, showing conditions for stability.
15. In the Cobweb model, if demand is steeper than supply (|dP/dQ| < |sP/dQ|):
(A) The system is stable ✅
(B) The system diverges
(C) It is neutral
(D) Unattainable equilibrium
Explanation:
When the demand curve is flatter (less steep) than the supply curve, price and quantity adjustments converge toward equilibrium.
16. If slopes of demand and supply are equal in Cobweb model:
(A) Stable
(B) Neutral oscillations (undamped) ✅
(C) Explosive
(D) Divergent
Explanation:
Equal slopes cause constant oscillations around equilibrium — neither converging nor diverging — known as neutral or undamped cycles.
17. Multiple equilibria occur when:
(A) Demand curve is backward bending ✅
(B) Supply curve is linear
(C) Cost curve is flat
(D) Production is constant
Explanation:
Backward-bending demand (as for inferior goods) can intersect supply more than once, yielding multiple equilibrium points.
18. The Arrow–Debreu model assumes:
(A) Convex preferences, no externalities ✅
(B) Increasing returns
(C) Non-convex utility
(D) Monopoly
Explanation:
For equilibrium to exist, Arrow–Debreu required convex preferences, continuous functions, and absence of externalities or joint production.
19. A unique and stable equilibrium exists under:
(A) Perfect competition and diminishing returns ✅
(B) Monopoly power
(C) Increasing returns
(D) Oligopoly
Explanation:
Perfect competition with diminishing returns ensures no incentive for divergence — yielding stable and unique equilibrium.
20. The automatic adjustment process in general equilibrium works best under:
(A) Government price control
(B) Perfect competition ✅
(C) Monopoly
(D) Price rigidity
Explanation:
Only under perfect competition can prices freely adjust through supply and demand, restoring equilibrium automatically.
Part C – Pareto Efficiency & Welfare (Q21–Q30)
21. Pareto Efficiency occurs when:
(A) Total utility is maximized
(B) No one can be made better off without making someone worse off ✅
(C) Equal income distribution
(D) Government maximizes welfare
Explanation:
A Pareto efficient allocation means all possible mutual gains from trade have been exhausted.
22. Efficiency in Exchange requires:
(A) MRTS equality
(B) MRT equality
(C) Equal MRS between individuals ✅
(D) Equal incomes
Explanation:
Exchange efficiency holds when the Marginal Rate of Substitution (MRS) between goods is the same for all consumers.
23. Efficiency in Production requires:
(A) MRTS_X = MRTS_Y ✅
(B) MRT = MRS
(C) MU_X = MU_Y
(D) Equal factor prices only
Explanation:
Production efficiency occurs when the Marginal Rate of Technical Substitution (MRTS) between factors is equal across firms.
24. Efficiency in Product Mix requires:
(A) MRS = MRT ✅
(B) MRTS_X = MRTS_Y
(C) MC = MR
(D) Equal profits
Explanation:
For optimal output mix, the Marginal Rate of Transformation (MRT) in production equals consumers’ MRS in consumption.
25. Pareto Efficiency is achieved when:
(A) Exchange, production, and product-mix efficiencies all hold ✅
(B) Only exchange is efficient
(C) Factor allocation is fixed
(D) Price = average cost
Explanation:
All three efficiencies (exchange, production, and product mix) together define a Pareto optimal general equilibrium.
26. First Welfare Theorem states:
(A) Every Pareto efficient allocation is competitive
(B) Every competitive equilibrium is Pareto efficient ✅
(C) Equity and efficiency coincide
(D) Monopoly leads to efficiency
Explanation:
Under perfect competition and no externalities, market equilibrium automatically leads to Pareto efficiency.
27. Second Welfare Theorem states:
(A) Equity and efficiency can’t coexist
(B) Any Pareto efficient outcome can be achieved via redistribution ✅
(C) Government must fix prices
(D) No equilibrium exists
Explanation:
The theorem separates efficiency from equity — government can redistribute initial endowments, and the market then achieves efficiency.
28. The Kaldor–Hicks criterion allows improvement if:
(A) Everyone gains equally
(B) Gainers could compensate losers ✅
(C) No one loses
(D) Income is equal
Explanation:
Under Kaldor–Hicks, an action is welfare-improving if winners could compensate losers, even if compensation doesn’t occur.
29. The Social Welfare Function was introduced by:
(A) Walras
(B) Bergson and Samuelson ✅
(C) Hicks
(D) Pareto
Explanation:
The Bergson–Samuelson Social Welfare Function (SWF) expresses collective welfare as a function of individual utilities.
30. Pareto Optimum is not achieved when:
(A) MRS_A = MRS_B
(B) MRTS_X = MRTS_Y
(C) MRT ≠ MRS ✅
(D) All resources are fully employed
Explanation:
If the marginal rate of transformation (production) doesn’t equal the marginal rate of substitution (consumption), the product mix is inefficient.
Part D – Edgeworth Box, Contract Curve & Core (Q31–Q40)
31. The Edgeworth Box represents:
(A) Two consumers and two goods ✅
(B) One good and two consumers
(C) Two producers and one good
(D) Government and consumer
Explanation:
It graphically shows allocations of two goods between two consumers (or factors between two producers).
32. The origin for Consumer A in the Edgeworth Box is:
(A) Bottom-left ✅ (B) Top-right (C) Center (D) Bottom-right
Explanation:
Consumer A’s quantities are measured from the bottom-left corner of the box.
33. The origin for Consumer B is:
(A) Top-right ✅ (B) Bottom-left (C) Center (D) Left edge
Explanation:
B’s origin is diagonally opposite A’s, so both measure goods in opposite directions.
34. Every point inside the Edgeworth Box shows:
(A) One consumer’s utility
(B) An allocation of goods between A and B ✅
(C) Production level
(D) National income
Explanation:
Each point indicates how total goods X and Y are divided between the two individuals.
35. The Contract Curve represents:
(A) All possible allocations
(B) All Pareto-efficient allocations ✅
(C) Inefficient allocations
(D) The PPF
Explanation:
The contract curve is the locus of tangency points between A’s and B’s indifference curves—Pareto efficient allocations.
36. At every point on the Contract Curve:
(A) MRS_A ≠ MRS_B
(B) MRS_A = MRS_B ✅
(C) MRTS_X = MRTS_Y
(D) Total utility minimum
Explanation:
When the marginal rate of substitution between goods is equal for both individuals, no further mutually beneficial trade is possible.
37. The Core of Exchange includes:
(A) Entire contract curve
(B) Efficient allocations preferred to initial endowment ✅
(C) Inefficient points
(D) Only one allocation
Explanation:
The core is the subset of Pareto-efficient points that both individuals prefer to their starting point (initial endowment).
38. In the production version of the Edgeworth Box, indifference curves are replaced by:
(A) Isoquants ✅ (B) Iso-cost lines (C) Demand curves (D) CICs
Explanation:
In production, isoquants (equal-output curves) replace indifference curves to show combinations of inputs producing equal output.
39. In the production Edgeworth Box, efficiency occurs when:
(A) MRTS_LK^X = MRTS_LK^Y ✅
(B) MRS_A = MRS_B
(C) MRT = MRS
(D) MU_X = MU_Y
Explanation:
Factor efficiency is achieved when both industries have the same marginal rate of technical substitution between labour and capital.
40. When MRS = MRT, the economy achieves:
(A) Efficiency in exchange
(B) Efficiency in production
(C) Efficiency in product mix ✅
(D) Market disequilibrium
Explanation:
Equality between consumer preferences (MRS) and production trade-off (MRT) ensures the right combination of goods is produced.