Explain the difference between productive efficiency and allocative efficiency. How do these efficiencies relate to monopolistic competition?
What will be an ideal response?
Productive efficiency happens when a firm produces an output that allows for the lowest average total cost. As a result, the demand curve is tangent with the ATC curve at the latter’s lowest point. With allocative efficiency, a customer pays the same amount for a product that it cost a firm to produce it. Therefore, with allocative efficiency, price equals marginal cost (P = MC). Monopolistically competitive firms fail to meet both productive efficiency and allocative efficiency. They produce less than what would allow the lowest cost. Also, they charge a higher price for a product than it costs them to make it.
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The primary objective of economics is
A) to learn how to create more resources. B) to study how people make choices with limited resources. C) to learn how to make the most profits with a given amount of resources. D) to study why some people are never happy with the resources they have.
Imagine an economy that produces capital goods and consumption goods. What will happen to its production possibilities curve if some of its existing capital stock wears out and is not replaced? How will your answer differ if more than enough capital is produced to replace the capital that wears out?