Question

In: Economics

When a price ceiling causes an inefficient allocation to consumers, this means that everyone who wants...

  1. When a price ceiling causes an inefficient allocation to consumers, this means that everyone who wants the good can purchase it.

TRUE                     FALSE

  1. The marginal physical productivity of labor (MPP) is inversely correlated with marginal cost (MC).                                             
    TRUE                     FALSE
  1. A market in equilibrium cannot capture any more gains from trade.

                                                TRUE                     FALSE

  1. Comparing the utility that one person receives from the consumption of a good to the utility of another person consuming a good is one way to make accurate comparisons.

                                TRUE                     FALSE

Solutions

Expert Solution

1. true

explanation.

Price ceilings often lead to inefficiency in the form of inefficient allocation to consumers: people who want the good badly and are willing to pay a high price don’t get it, and those who care relatively little about the good and are only willing to pay a low price do get it.

Price ceilings typically lead to inefficiency in the form of wasted resources: people expend money, effort, and time to cope with the shortages caused by the price ceiling.

How Price Ceilings Cause Inefficiency

•Price ceilings often lead to inefficiency in that the goods being offered are of inefficiently low quality: sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price.

A black marketis a market in which goods or services are bought and sold illegally—either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling.

A price ceiling, a maximum market price below the equilibrium price, benefits successful buyers but creates persistent shortages. Because the price is maintained below the equilibrium price, the quantity demanded is increased and the quantity supplied is decreased relative to the equilibrium quantity. This leads to predictable problems: inefficiencies in the form of deadweight lossfrom inefficiently low quantity, inefficient allocation to consumers, wasted resources,and inefficiently low quality. It also encourages illegal activity as people turn to black marketsto get the good

2. false

The marginal product of labor is directly related to costs of production. Costs are divided between fixed and variable costs. Fixed costs are costs that relate to the fixed input, capital, or rK, where r is the rental cost of capital and K is the quantity of capital. Variable costs (VC) are the costs of the variable input, labor, or wL, where w is the wage rate and L is the amount of labor employed. Thus, VC = wL . Marginal cost (MC) is the change in total cost per unit change in output or ∆C/∆Q. In the short run, production can be varied only by changing the variable input. Thus only variable costs change as output increases: ∆C = ∆VC = ∆(wL). Marginal cost is ∆(Lw)/∆Q. Now, ∆L/∆Q is the reciprocal of the marginal product of labor (∆Q/∆L). Therefore, marginal cost is simply the wage rate w divided by the marginal product of labor

MC = ∆VC∕∆Q;

∆VC = w∆L;

∆L∕∆Q (the change in quantity of labor to effect a one unit change in output) = 1∕MPL.

Therefore MC = w ∕ MPL

Thus if the marginal product of labor is rising then marginal costs will be falling and if the marginal product of labor is falling marginal costs will be rising (assuming a constant wage rate)

3. true

In economics, gains from trade are the net benefits to economic agents from being allowed an increase in voluntary trading with each other. In technical terms, they are the increase of consumer surplusplus producer surplus from lower tariffs or otherwise liberalizing trade.

Gains from trade are commonly described as resulting from:

  • specialization in production from division of labor, economies of scale, scope, and agglomeration and relative availability of factor resources in types of output by farms, businesses, location and economies
  • a resulting increase in total output possibilities
  • trade through markets from sale of one type of output for other, more highly valued goods

4.false

Utility: The ability of agood to satisfy a want.

Goods are desired because of their ability to satisfy human wants. The property of a goodthat enables it to satisfy human wants is called utility.As individuals consume more of agood per time period, their total utility (TU)or satisfaction increases, but their marginalutility diminishes. Marginal utility (MU)is the extra utility received from consumingone additional unit of the good per unit of time while holding constant the quantity con-sumed of all other commodities.


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