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BA 372 Lesson 4 Assignment 2

BA 372 Lesson 4 Assignment 2 - being maximized...

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Ashley B. Hilliard 258-10-0169 July 5, 2010-October 22, 2010 BA 372 Lesson#4, Assignment 2 1. What does the invisible hand do? The term “invisible hand” suggests there is an invisible balance between supply and demand in the market place. If there's too much supply, the invisible hand pushes the price down until vendors are able to sell their overstock. If there is less demand, the invisible hand guides production down and pushes prices up. 2. Name two types of market failure. Explain why each may cause market outcomes to be inefficient. Two types of market failure are market power and externalities. Market power may cause market outcomes to be inefficient because when firms influence prices they cause price and quantity to differ from the levels they would be under perfect competition, which keeps total surplus from
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Unformatted text preview: being maximized. Externalities are side effects that are not taken into account by buyers and sellers. As a result, the free market does not maximize its total surplus. 3. An early freeze in California sours the lemon crop. Explain what happens to consumer surplus in the market for lemons. Explain what happens to consumer surplus in the market for lemonade. The supply of lemons is decreased. Decrease in CS from (A + B + C) to just A. Lemons is the input in the market for lemonade, so a higher price of lemons represents an increase in cost conditions of producing lemonade. The supply of lemonade shifts left, and consumer surplus declines from D + E + F to just D....
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