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Question from Past Microeconomics Qualifying ExamEdit

Spring 2001 - Section I, Question five, George Mason University

State first whether the following statements are true, false, or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.


Money is the only efficient birthday gift.

AnswerEdit

In Kind 2

Uncertain, This like other things, depends on preferences. If the person receiving the gift values the time that you spent thinking about them, then the money will not be as appreciated. Still, it makes sense that because people can choose the bundle that they wish to buy they would not be worse off with money. The trick comes when we have a positive value on people shopping for us as well as a binding "in-kind" constraint from the gift. Then it would be uncertain without specific equations to solve.

In the graph to the right, the person with green utility curves is bound by the gift, would have been better off with the money. On the other hand, the person with the red indifference curves can get the same bundle regardless of the gift or the cash, so this is a likely person for wanting a gift (assuming this positive value to recieving).

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