Explain why the competitive output maximizes welfare
What will be an ideal response?
If less output is produced, then the last unit that is consumed will be valued by consumers more than the cost of producing it. If output is increased to the competitive level, consumers will value those additional goods more than the cost of producing them, and welfare will increase. If output is greater than the competitive output level, then the cost of producing the units beyond the competitive level is greater than the value. At output levels greater than the competitive level, welfare is decreased. Thus, the competitive output level maximizes welfare, because consumers value the last unit of output at exactly the amount that it costs to produce it.
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An increase in government spending will cause the
A) LM curve to shift to the right. B) LM curve to shift to the left. C) IS curve to shift to the right. D) IS curve to shift to the left.
The economy is initially in long-run equilibrium. Expectations are adaptive, prices and wages are flexible, and there is an unanticipated increase in aggregate demand. In the short run, the price level will be __________ than it was in long-run equilibrium and Real GDP will be __________ than it was in long-run equilibrium
A) higher; lower B) lower; higher C) lower; lower D) higher; higher