Question

QUESTION 6

1. TRUE/FALSE. EXPLAIN. All actions in which the marginal costs exceeds the marginal benefit should be undertaken.

2. If a firm is experiencing decreasing marginal returns to labor, the firm's production function is ________ at a(n) ________ rate. AND EXPLAIN

   		increasing; increasing
   		increasing; decreasing
   		decreasing; increasing
   		decreasing; decreasing

3. If a competitive market is producing at the efficient quantity, all of the following are true except which one?AND EXPLAIN

   		Total surplus is maximized.
   		Deadweight loss is equal to zero.
   		The efficient quantity is being produced.
   		The marginal benefit to society exceeds the marginal cost

* I know the answer is D. The marginal benefit to society exceeds the marginal cost, but need help with explaining.

4. An increase in the cost of flour will shift the supply curve for bread to the ________ and ________ the equilibrium quantity of bread.AND EXPLAIN

		right; increase
		right; decrease
		left; increase
		left; decrease

*I know the answer is D. left; decrease, but need help with explaining

Answer 1

Ans - 6) FALSE .

Reason -: A consumer always chooses that alternative in which marginal benefit is either more than marginal cost or is equal to marginal cost . Any alternative having marginal cost greater than marginal benefit is not chosen.

Ans : If a firm is experiencing decreasing marginal returns to labour , the firm's production function is increasing at a decreasing rate .

Reason -: Production function is the total product received from the inputs viz labour and land. Since land is fixed , we can change the labour and it is a variable factor . When we receive decreasing marginal returns to labour , it means the marginal product by additional labour is falling i.e. additional labour is adding less to total product . So diminishing marginal returns mean that there is some addition to total product , naturally it will increase but the addition is at a decreasing rate . Hence , the increase in production function is at a decreasing rate.

Ans : (D) When marginal benefit to society exceeds marginal cost .

Reason -: In a competitive market , producing at efficient quantity means :

• Total surplus is maximised .
• There is no dead weight loss.
• The efficient quantity is produced .
• Marginal benefit is equal to marginal cost.

Efficient quantity is set at that point where marginal benefit to society is equal to marginal cost . Any divergence from such point will lead to over-production or under-production and the market will correct the gap by adjusting to the equality point of marginal benefit and cost.

Ans -4) left , decrease.

Reason -: Flour is the raw material for bread . Any increase in price of flour will also lead to a price rise of bread.

Rising prices are shown by leftward shift of supply curve .When prices increase there will be a decrease in equilibrium quantity because at higher prices , consumer will demand less and there will be contraction along the demand curve.