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Homework 2Solutions - HOMEWORK 2 SOLUTIONS EFFECIENCY AND...

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HOMEWORK 2 SOLUTIONS- EFFECIENCY AND FAIRNESS OF MARKETS MICROECONOMICS; 21:220:101:0; 02.15.2012 1. Give brief definitions for the following - a. Producer’s surplus- is the total benefit earned by producers of a good or service, due to a difference between the market price and the cost of production for the good/service. b. Consumer’s surplus- is the total benefit earned by consumers of a good or service, due to a difference between the value earned and the market price paid for the good/ service. c. Allocative efficiency- reflects that point of efficiency on the PPF which people value the most. At this level, the markets are most efficient because the total surplus is maximized. The point of allocative efficiency is shown by the intersection of the marginal benefit and marginal cost curve. d. Deadweight loss- is the loss incurred by the society because of underproduction (underutilization of available resources) or overproduction (overutilization of available resources). Deadweight loss reduces the consumer and producer surpluses. e. Marginal benefit and marginal cost- marginal benefit is the value placed on satisfaction or utility achieved from the consumption of an additional unit of a good/service. Marginal benefit decreases as we consumer more units of a good. Marginal cost on the other hand, is the value placed on the opportunity costs from producing an additional unit of a good/service. Opportunity costs increase as we produce more units of a good. 2. In the figure above, the equilibrium market price is $20. What does area A denote? Calculate the value of the producer surplus. Since area A is below the market price of $20, it denotes the producer surplus. The value of the producers’ surplus is given by 3.
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