can you think of a suitable framework to explain allocative efficiency and marginal productivity of capital

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Expert Solution

Allocative efficiency plays a major role in determining the societal welfare or total Welfare of the society. In case of allocative efficiency, the additional cost of the production of last unit is equal to the additional benefit of producing it. This indicates that the marginal cost and marginal revenue or equal to each other. Allocative efficiency in case we are marginal cost does not reflect the social marginal cost is not likely to be achieved. In that case there is a deadweight loss the society which measures the total surplus that is not achieved. Allocative efficiency maximize the sum of consumer surplus and producer surplus.

Marginal productivity of capital is the additional product that is resulted when one additional unit of capital is employed in the production process. It is a noted that while calculating the marginal product of capital all other factors are considered to be constant and not changing. There is a process called capital deepening which indicates that as the capital unit is increased the marginal productivity of capital goes on falling which is also known as diminishing marginal Returns.

Rahul Sunny answered 1 year ago

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