Question

PART A requires the student to do the following four concepts and provide a definition and brief explanation of their importance in microeconomic analysis.

3) Three features or characteristics a good must have to be regarded as

a Giffen Good;

4) Allocative Efficiency.

Answer 1

3)

a) A giffen good is a good for which demand increase as price of the good increases. Giffen good violates the law of demand. Three characterstics that a good must possess to be considered as a giffen good are:

• Number of substitutes available should be very small so that if price increases then consumer does not have the option to buy another good and have to stick on giffen good.
• It must be an inferior good that is a good for which demand decreases due to a rise in income.
• Consumer must spending a large proportion of its income on a good.

4)

Allocative efficiency refers to the level of output where Price of the commodity is equals to the marginal cost of production. This point is allocative efficient because here the total surplus maximizes and there is no deadweight loss. A point is Allocative efficient, if the movement from that point cause decrease in surplus of any party involved.

If we talk about different market situations then only perfectly competitive optimal condition is an allocative efficient result.