Consider a competitive market in which people consume at the point where their marginal rates of substitution between products X and Y are 3/5
In this same market, producers produce where their marginal rates of transformation between X and Y are also 3/5. However, producers are producing 7 of Y and 3 of X, and consumers wish to consume 5 of Y and 5 of X per unit of time. Explain how this situation can exist. Also determine if it represents an equilibrium or not. If not an equilibrium, what will tend to happen in the market?
Because MRS = MRT, one would expect output efficiency. However, producers are not producing quantities of X and Y that equal the quantities of X and Y that consumers wish to purchase. In this case producers are producing more of Y and less of X than consumers wish to purchase. Prices in the market will adjust such that the price of Y will fall and the price of X will rise. This means that the ratio of prices PX / PY increases, and the price line will move along the production frontier. An equilibrium results when the price ratio is PX > PX and PY < PY. More of X will be produced and less Y will be produced. At the equilibrium, producers will be producing quantities of both X and Y that just equal the quantities being taken from the market by consumers. At the new equilibrium the new MRT = MRS , and the competitive equilibrium will be efficient.
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On the vertical axis, the production possibilities frontier shows ________; on the horizontal axis, the production possibilities frontier shows ________
A) the quantity of a good; the number of workers employed to produce the good B) the quantity of a good; the price of the good C) the quantity of a good; a weighted average of resources used to produce the good D) the quantity of one good; the quantity of another good
In an eight-hour day, Andy can produce either 24 loaves of bread or 8 pounds of butter. In an eight-hour day, Bob can produce either 8 loaves of bread or 8 pounds of butter. Andy has a comparative advantage in the production of
A) bread, while Bob has a comparative advantage in the production of butter. B) butter, while Bob has a comparative advantage in the production of bread. C) bread and neither has a comparative advantage in the production of butter. D) both bread and butter.
The table above shows the demand and costs for a single-price monopolist. When it maximizes its profit, the firm makes an economic profit of
A) $15. B) $25. C) $40. D) $45.
On-budget expenditures:
What will be an ideal response?