Question

1. If the marginal cost was $35, and the marginal benefit was $15, should the production level be increased, decreased, or left the same?

2. If the marginal cost was $20, and the marginal benefit was $45, should the production level be increased, decreased, or left the same?

3. When is allocative efficiency achieved?

4. Assume a company increases production of t-shirts to 100 to 150, but had to decrease production of pants from 200 to 175. What is the opportunity cost of producing more t-shirts?

5. What is the relationship between price and quantity demanded?

Answer 1

1. Production level should be increased.

Allocative efficient occurs where Marginal benefit = Marginal cost. When MC > MB then increase in production leads to decrease in MC and increases MB.

2. Production level should be decreased.

Decrease in production increases MC and decreases MB and leads to equality of MC and MB.

3. Allocative efficiency is achieved where marginal benefit to consumer becomes equal to the marginal cost of producing the good.

4. To produce 50 more t-shirts, company has to reduce production of pants by 200 - 175 = 25 units. So, opportunity cost of producing more t-shirts is 25 pants.

5. There is inverse relationship between the price of commodity and its quantity demanded. Increase in price decreases purchasing power of person and as a result quantity demanded by it decreases and vice-versa.