Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC) but only the perfectly competitive firm achieves allocative efficiency. Explain why this is the case
What will be an ideal response?
Unlike the perfectly competitive firm, the monopolistically competitive firm faces a downward sloping demand curve which means that the firm must lower its price to sell additional units of output. As a result, price will always be greater than marginal revenue (P > MR). By contrast, the perfectly competitive firm faces a horizontal demand curve and P = MR. The profit-maximizing rule, MR = MC, applies to all firms but because in perfect competition P = MR the rule can be written as P = MC. A firm achieves allocative efficiency if it charges a price equals to the MC of producing the last unit. This condition is satisfied at the profit-maximizing output for the perfectly competitive firm (since P = MC = MR) but will not hold for the profit maximizing output of monopolistically competitive firm for which P > MR = MC.
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A horizontal demand curve is perfectly elastic because a change in price will not induce a change in quantity demanded.
Answer the following statement true (T) or false (F)
When the Fed buys a U.S. government security:
a. the volume of loans issued by the banking system increases and investment will tend to increase. b. the volume of loans issued by the banking system increases and investment will tend to decrease. c. the volume of loans issued by the banking system decreases and investment will tend to increase. d. the volume of loans issued by the banking system decreases and investment will tend to decrease.
Who owns the Fed?
a. the federal government b. the 50 state governments c. the District Federal Reserve Banks d. it has no ownership, which is why it is called independent e. member banks
Which one of the following is an area of continued disagreement among modern macroeconomists with regard to the use of fiscal policy?
a. Automatic stabilizers help reduce the fluctuations in aggregate demand and output. b. It is difficult to time changes in discretionary fiscal policy in a manner that will promote stability. c. Fiscal policy is much less potent than the early Keynesian view implied. d. Budget deficits are a highly effective tool with which to combat a severe recession.