1. Let's assume there are ten people a mythical country named OZ. Each person has an original endowment of $10. Now let's assume one of the ten is LeBron James, the famous NBA star. LeBron decides to put on an exhibition and charge $2 each. The remaining 9 people willingly pay to see to see LeBron. At the end of the day LeBron has $28 and the remaining 9 have $8 each.

Using the above scenario, answer the following questions:

i. Define Pareto efficiency. Be sure to address exchange and production efficiency

ii. Is the original distribution Pareto efficient? Is the second?

Explain how you know. iii. What has happened to income inequality in the second case?

iv. Is this new distribution unfair?

Please answer using the ideas f exchange we discussed in class. v. In this context, discuss the efficiency equity tradeoff.

2. For each of the cases below, discuss what market failures might be (or are) used as a partial rationale:

i. Seat belt regulations ii. Regulations on automobile exhaust iii. Medicare iv. National Defense

3. Where should each of the following goods lie in figure 5.2 in the text?

i. College Education ii. Water iii. Electricity iv. Police Protection v. Basic Research