Class01_30 - 01/30/2008 Class Notes (cover part of Chapter...

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01/30/2008 Class Notes (cover part of Chapter 5 in the textbook) Class Outline Market Efficiency Market Efficiency Is the competitive market efficient? To answer this question, consider the following example: Example : Consider the Croissants market. The Market Demand and Supply are represented, respectively, as follows: 2 16 1 7 2 2 d s p q p q = - + = + In equilibrium s d q q q = = So you can solve for the equilibrium equating the right hand side of the 2 equations above as follows: 1 7 5 25 2 16 * 5 2 2 2 2 q q q q - + = + - = - = Plug q* either in the demand or in the supply and find the equilibrium price: 1 7 * 2*(5) 16 *5 6 2 2 p = - + = + = In equilibrium p*=6 and q*=5 At q=3 MB=MSB=$10 but MC=MSC=$5 MSB>MSC q to achieve Allocative Efficiency; At q=7 MB=MSB=$2 but MC=MSC=$7 MSB<MSC q to achieve Allocative Efficiency;
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D=MSB
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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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Class01_30 - 01/30/2008 Class Notes (cover part of Chapter...

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