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Unformatted text preview: Chapter 14 - Equilibrium and Efficiency Part V: Markets Chapter 14: Equilibrium and Efficiency Main Concepts and Learning Objectives This chapter focuses on equilibrium and efficiency. The equilibrium discussion includes short-run and long-run equilibrium, and market adjustments to shocks such as shifts in demand or changes in cost conditions. The efficiency discussion explains the concepts of Pareto efficiency and economic efficiency, and the connection between aggregate surplus and efficiency. The chapter explains the computation of aggregate surplus, consumer surplus and producer surplus, and the impact of market processes on these measures. Skills needed for this chapter: Students will use algebra to find the market equilibrium and compute changes in the equilibrium in response to shifts in demand or supply. This information is presented in Section 3 of Chapter 2. Students who master the material presented in this chapter will be able to: Compute market supply and demand, and analyze the impact of changes in the number of firms on supply Compute the long run equilibrium P and Q Compute the new short run equilibrium P and Q that will result from a change in demand, and compute the impact on the long run number of firm Compute aggregate surplus, consumer surplus and producer surplus List criteria for economic efficiency Discuss conditions that create tradeoffs between efficiency and equity 14-1 Chapter 14 - Equilibrium and Efficiency Multiple Choice Quiz (10 questions) covering main points: 1. When the number of firms producing and selling product X increases, the market supply curve shifts a. shifts to the right. b. shifts to the left. c. does not shift because supply is the same as the marginal cost curve. d. none of the above 2. In order to produce good X efficiently, it is necessary to use a chemical process that was invented by Smith, Inc. Smith, Inc. holds the patent on this process. They can decide whether to sign a licensing agreement to permit a firm that produces good X to use the chemical process. Smith, Inc, is currently the only firm that produces good X. Does this market have free entry? a. no, because Smith, Inc is a monopolist b. no, because the technology is not freely available c. This market could have free entry if Smith, Inc. announced that it would sign a licensing agreement with any firm that applies. If this happened, any firm could use the chemical process if they pay an annual fee to Smith, Inc. of $5million. d. both b and c 3. In long-run equilibrium with free entry: a. the equilibrium price must equal the minimum average total cost. b. profit is equal to zero. c. each active firm must produce at its efficient scale of production ....
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This note was uploaded on 04/06/2011 for the course ECON 3332 taught by Professor Craig during the Spring '11 term at Rensselaer Polytechnic Institute.
- Spring '11