Explain how the free-market mechanism adjusts prices so that resource allocation is economically efficient.
What will be an ideal response?
Firms are induced to buy and use inputs so that they yield the most-valuable outputs per unit of input. Prices are the rationing agents in their decision making. In distribution, the pricing mechanism serves to allocate products among consumers in ways that match individual preferences as they seek to maximize utility. Firms are induced to set MC equal to price, and consumers are induced to set MU equal to price, thus guaranteeing that the rule for efficiency, MC = MU, is satisfied.
You might also like to view...
If a tax of $1 a can is imposed on the buyers of sugary drinks, the demand for sugary drinks ______ and the price that buyers pay ______
A. doesn't change; doesn't change B. doesn't change; rises by $1 a can C. decreases; rises by more than $1 a can D. decreases; rises by less than $1 a can
The risk adjusted discount rate
A) is the sum of the risk-free rate and the risk premium. B) includes risk in the denominator of the present value calculation. C) includes risk in the numerator of the present value calculation. D) All of the above