Exchange efficiency, input efficiency, and substitution efficiency are satisfied when ______________________. This result is known as ______________.
A)free trade occurs; Walras Law.
B)all markets are at a general competitive equilibrium; Walras Law.
C)all markets are at a general competitive equilibrium; the First Fundamental Theorem of Welfare economics.
D)resources are scarce; the First Fundamental Theorem of Welfare economics.

Question

Quizplus · Accepted Answer

The First Fundamental Theorem of Welfare economics states that if all markets are at a general competitive equilibrium, then exchange efficiency, input efficiency, and substitution efficiency are satisfied. This leads to the optimal allocation of resources and maximum social welfare. Therefore, choice C is the correct answer. Choice A and B are not correct because free trade and general competitive equilibrium do not guarantee the satisfaction of the three efficiency conditions. Choice D is incorrect because while resources being scarce is a necessary condition for efficiency, it is not sufficient without the conditions of general competitive equilibrium. Exchange efficiency, input efficiency, and substitution efficiency are all present when all markets are at a general competitive equilibrium, which is defined as the condition in which no individual can improve their well-being by making a different decision. This result is known as the First Fundamental Theorem of Welfare economics. Option A is incorrect because free trade alone does not guarantee that all markets are at a general competitive equilibrium. Option B is incorrect as it only addresses the condition of general competitive equilibrium but does not mention efficiency requirements. Option D is also incorrect as the scarcity of resources is a fundamental concept of economics, but it does not guarantee efficient outcomes in markets.

Exchange Efficiency, Input Efficiency, and Substitution Efficiency Are Satisfied When