Consider the supply and demand graph below to answer three questions: (a) Use a letter to identify the area of maximum consumer surplus; (b) Use a letter to identify the area of maximum producer surplus; (c) Why is the output level shown by the vertical
dashed line one that is allocatively efficient from a marginal cost and marginal benefit perspective?
What will be an ideal response?
(a) a; (b) b; (c) The demand curve represents the dollar value o f the marginal benefit that consumers place on each unit. The supply curve represents the dollar value of the marginal opportunity cost of producing each unit. At the intersection of the supply and demand curve, the marginal benefit just equals the marginal cost. Also at this output level, the consumer surplus and the producer surplus are at a maximum.
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a. True b. False Indicate whether the statement is true or false
National defense is provided by the government because
a. it is impossible for private markets to produce public goods. b. products provided by the government are produced more efficiently. c. free-riders make it difficult for private markets to supply the socially optimal quantity. d. public goods increase government revenues.
A coffee manufacturer raises the price of its coffee by 10%, and the quantity demanded of its coffee falls by only 12%. This firm has
A. not been able to prevent its competitors from competing with it on price. B. some output power. C. no control over the market price since the quantity demanded fell by a larger percentage than the percentage price increase. D. some market power.
Due to Pigou's "defective telescopic faculty," a market economy is inefficient in allocating resources between the present and the future
a. True b. False Indicate whether the statement is true or false