Question

SET A

1.) What is Market Failure (define). Name the 4 causes of Market Failure and explain each cause of market failure.

2.)What is Opportunity Cost (Define and Explain) ? Give an example of an Opportunity Cost.

3.) What is a Demand Schedule & Demand Curve (Define and Explain)? What does a Demand Schedule and Demand Curve tell (State) in economics?

4.) What is Total Revenue and How is it calculated (formula)?

5.) What is a Production Function (Define and give an example of a production function)?

6.) What is Marginal Cost (definition), How is it Calculated "Formula" (Give an Example of example of how Marginal Cost is calculated).

Answer 1

Answer to the first question is provided below :

1) Market failure occurs when the market system fails to allocate resources in the most efficient way possible . This results in the loss of social as well as economic welfare . Here the free market allocates in such a manner that is not beneficial for society as a whole .

The 4 causes of market failure are :

a) Public goods : Non rivalrous and non excludable in nature . So there is a tendency for over consumption of public goods and under production by private entities . Without intervention the market fails .

b) Externalities : Consequences on a third party due to economic transaction between two entities . As for example pollution generated by a factory which affects the people staying nearby the factory . This causes the social marginal cost to be higher than private marginal cost and results in welfare loss if externality is not internalized .

c) Asymmetric information : This is a problem when one person has more knowledge than another , as for example a seller of second hand car has more knowledge about the conditions of the car and can easily manipulate or hide information from the buyer . This causes loss of welfare and inefficient allocation in the market .

d) Market power : Abuse of market power as in case of monopoly , causes the market price to be higher than allocative efficiency and quantity to be lower than perfectly competitive market . This results in dead weight loss and market failure .