1. Economic theory leads to the conclusion that, under certain circumstances, th
ID: 1097013 • Letter: 1
Question
1. Economic theory leads to the conclusion that, under certain circumstances, the free-market outcome is efficient. Specifically, an outcome is said to be efficient if:
a.
the living standards of each member of society are maximized.
b.
the marginal benefit of the last unit produced in each market equals the marginal cost.
c.
the marginal benefit of the last unit produced in each market is maximized.
d.
consumer surplus is equal to producer surplus.
a.
the living standards of each member of society are maximized.
b.
the marginal benefit of the last unit produced in each market equals the marginal cost.
c.
the marginal benefit of the last unit produced in each market is maximized.
d.
consumer surplus is equal to producer surplus.
Explanation / Answer
(C) the marginal benefit of the last unit produced in each market is maximized.
Reason
Consumers' and producers' surplus is value as people perceive it. An market outcome is economically efficient if value is maximized.
Economic efficiency is central to microeconomics because it helps us probe how markets work (its positive side) and it also provides a criterion for evaluation of markets (its normative role). If a market is economically inefficient, we have to ask why people are leaving value on the table. Why do they not find ways to capture that value? We will see in later chapters that asking this question leads us to appreciate a number of business practices. The normative aspect leads us to the concept of market failure and prompts questions of whether government policy can remedy the failure or whether it contributes to it.
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