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Class01_30

# Class01_30 - Class Notes(cover part of Chapter 5 in the...

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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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In Equilibrium MSC=MSB=\$6 or MC=MB and we achieve allocative efficiency! D=MSB # of croissants p q*=5 S=MSC A’ E C’ q*=3 q*=7 p* MSC=\$5 MSB=\$2 MSC=\$7 MSB=\$10
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Class01_30 - Class Notes(cover part of Chapter 5 in the...

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