Question

8-1. In which of the following situations should a profit-maximizing firm leave its output unaltered?

A) MR > MC and Price > Average total cost

B) MR = MC and Total revenue < Total variable cost

C) MR < MC and Price < Average total cost

D) MR = MC and Total revenue > Total variable cost

8-2. Suppose that, recognizing that an efficient market out come may not be equitable, a central planner announces that each agent's net benefit (the difference between the reservation value and the price paid) beyond a certain amount will be taken away and redistributed to other agents whose net benefit is below the specified level. This policy is expected to produce ___________.

A) an efficient out come where every agent has the same net benefit

B) an efficient outcome where every agent has 0 net benefit

C) an inefficient outcome where no trade will occur

D) an inefficient outcome where trades will occur at the higher price than at the equilibrium

Answer 1

8.1 Answer D

We say that a firm is profit maximizing when Marginal Revenue equals to Marginal Cost. So in this case, if suppose the total variable cost is more than total revenue, the firm's at a loss and hence needs to alter its strategy. But on the other hand, when Total revenue is greater than Total variable cost, the firm's actually making profits hence no need to alter anything.

8.2. Answer A

In my view, the policy seeks to achieve an equilibrium where every agent gets the same benefit by channelizing the larger benefits earned by one set of agents, and redistributing as per the requirements of other set of agents whose net benefits is below a certain level. This will help in balancing out the deficits faced by the latter set of agents thus enabling a market equilibrium.