Question

Government contracts often pay on a cost-plus basis. The means the price the government pays to the producer is all costs of production plus "x" percent.

Critics say this encourages firms to pad costs (e.g. hire more people than necessary at high salaries). This sounds like __________ failure and is_______ inefficiency.

Question 38 options:

a)	market -- productive

b)	market--allocative

c)	government--productive

d)	government--allocative

Answer 1

Answer: C

EXPLAINATION: This sounds like Market Failure and is Productive inefficiency.As the terms its self explain meaning:

Government failure results due to government intervention in the economy causes an inefficient allocation of resources and a decline in rather welfare in economy.

Production inefficiency means when a firm is not producing at its lowest unit cost. Which means

output occurs at a cost higher than minimum average cost as firms hire more people athigher salaries to get work done as government will pay them for it.

Hope it helps!