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Chapter 8: Q.9 (page 211)

Productive efficiency and allocative efficiency are two concepts achieved in the long run in a perfectly competitive market. These are the two reasons why we call them 鈥減erfect.鈥� How would you use these two concepts to analyze other market structures and label them 鈥渋mperfect?鈥�

Short Answer

Expert verified

If a market fails to produce at the minimum average cost, or is unable to meet the equilibrium of MC=MR, then we call it imperfect.

Step by step solution

01

Definition

A perfectly competitive market is said to be the one where profit-maximizing output is determined by two conditions-

MC = MR

MC cuts the MR curve

This is referred to as the allocative and productive efficiency, i.e. allocation of resources is such that the production is maximum and efficient.

02

Explanation

A market is said to be imperfect when it is not able to determine the profit-maximizing equilibrium point through the above-mentioned two conditions. If, in the long run, the market is unable to produce at a quantity that is at the lowest of the average cost curve, then such market is said to be failed in meeting the allocative and productive efficiency. Hence, such a market is imperfect.

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Most popular questions from this chapter

A market in perfect competition is in long-run equilibrium. What happens to the market if labor unions are able to increase wages for workers?

In the argument for why perfect competition is allocatively efficient, the price that people are willing to pay represents the gains to society and the marginal cost to the firm represents the costs to society. Can you think of some social costs or issues that are not included in the marginal cost to the firm? Or some social gains that are not included in what people pay for a good?

Suppose that the market price increases to $6, as Table 8.14 shows. What would happen to the profit-maximizing output level?

Briefly explain the reason for the shape of a marginal revenue curve for a perfectly competitive firm.

1. A computer company produces affordable, easy-to-use home computer systems and has fixed costs of \(250. The marginal cost of producing computers is \)700 for the first computer, \(250 for the second, \)300 for the third, \(350 for the fourth, \)400 for the fifth, \(450 for the sixth, and \)500 for the seventh.

a. Create a table that shows the company鈥檚 output, total cost, marginal cost, average cost, variable cost, and average variable cost.

b. At what price is the zero-profit point? At what price is the shutdown point?

c. If the company sells the computers for \(500, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.

d. If the firm sells the computers for \)300, is it making a profit or a loss? How big is the profit or loss? Sketch a graph with AC, MC, and AVC curves to illustrate your answer and show the profit or loss.
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