Reading 14: Efficiency and Equity LOS e习题精选 efficient, statements, efficiency, allocation, 2010

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LOS e: Explain (1) how efficient markets ensure optimal resource utilization and (2) the obstacles to efficiency and the resulting underproduction or overproduction, including the concept of deadweight loss.

Matthew Reeves is listening to a discussion on how resources move to the most efficient allocation. Two of the participants make these statements:

Statement 1: When resources are diverted from beer production to wine production, this represents an inefficient allocation from the perspective of the beer producers.

Statement 2: Market allocation of resources tends toward efficiency because the value of what a resource can produce determines its allocation in production.

With respect to these statements:

A) both are correct.

B) only statement 2 is correct.

C) only statement 1 is correct.

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Reeves should disagree with Statement 1. In the competitive market, resources are diverted away from goods for which final consumer demand is decreasing, and toward the production of goods for which final consumer demand is increasing. If the market is diverting resources from producing beer to producing wine, it is because consumers have changed their decisions and begun offering more money for wine and less for beer. This means beer brewers are producing more than consumers demand and generating losses on the excess production. They will maximize their profits by reducing their production and using fewer resources. Thus, the new allocation of resources is efficient even from the point of view of the beer producers.

Reeves should agree with Statement 2. The market constantly reallocates productive resources to uses where what they produce is valued more by final consumers, and removing them from uses where what they produce is valued less. When there are no obstacles, resources are always moving toward their most efficient (value maximizing) allocations.

 

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Fred Heyach and Gord Murdoll are discussing whether or not competitive markets use resources efficiently. Heyach says, “Competition must lead to the efficient allocation of resources. Consumers are willing to pay more for the goods they want most, so producers of those goods can outbid other producers for the resources to make them.” Murdoll replies, “At any one point in time the market might allocate resources efficiently given consumers’ preferences, but as consumers change their minds about which goods they want, the allocation of resources becomes inefficient.”

With respect to these statements:

A) both are correct.

B) only Murdoll is correct.

C) only Heyach is correct.

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Heyach’s statement is correct but Murdoll’s statement is incorrect. Competitive forces adjust the allocation of resources to changes in consumer preferences. If consumers’ demand for a product decreases, the resources that were being used to produce it are diverted to the production of other goods that are in greater demand.

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According to the “invisible hand” principle, which of the following statements is least accurate?

A) The authority of the state, although not seen, must always be present in the market.

B) Efficient allocation of productive resources occurs through competition.

C) Producers serve society’s interest by serving their own self-interest.

The “invisible hand” to which Adam Smith referred in The Wealth of Nations did not include any legal authority. Rather, Smith was describing the way that individual producers serve society’s interest by competing with one another to produce the goods and services that are valued most highly by final consumers, even though the producers do not have society’s interest explicitly in mind.

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Consider the following two final consumer goods:

Good W requires the inputs of raw material R and intermediate goods S and T.
Good X requires the inputs of raw material R and intermediate goods U and V.

If demand for Good W increases and demand for Good X decreases, which of the following outcomes is least likely?

A) Some of raw material R will be diverted away from the producers of Good X.

B) More resources will be devoted to producing Good W and less to producing Good T.

C) The price of Good U will decrease and the price of Good S will increase.

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If demand for Good W increases and demand for Good X decreases, the market will allocate more resources to producing Good W and the goods that go into producing Good W (that is, Good S and Good T), and less to producing Good X and the goods that go into producing Good X (that is, Good U and Good V). Changes in the relative prices of all these goods are the signal that tells their producers where to direct resources. Prices will increase for goods W, S and T while prices decrease for Goods X, U and V.

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Which of the following statements regarding deadweight loss is least accurate?

A) An overproduction of goods can lead to a reduction in consumer surplus.

B) Deadweight loss from underproduction leads to a loss of producer surplus but not consumer surplus.

C) Deadweight loss occurs when the quantity supplied does not maximize the sum of consumer and producer surplus.

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Deadweight loss is the reduction in consumer and producer surplus due to underproduction or overproduction.

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Christine Dobbs is watching a public affairs television program on which one of the participants makes the following statements:

Statement 1: A common resource is an obstacle to the efficient allocation of resources unless it generates external benefits.

Statement 2: The idea of utilitarianism suggests that market allocation of resources does not maximize the value of an economy to all individuals. However, achieving the results that utilitarianism regards as optimal involves a loss of economic output.

With respect to these statements:

A) only one is correct.

B) both are correct.

C) both are incorrect.

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Common resources and external benefits both represent obstacles to the efficient allocation of resources. Common resources tend to be overused and external benefits suggest that less than the efficient quantity is produced. Utilitarianism is the idea that fairness means all individuals own the same amount of resources. To bring about such an outcome would require transferring wealth from high income earners to low income earners. This would result in high income earners working less, so the economy would produce less wealth overall. The time and effort required to transfer the wealth would also divert resources from productive uses.

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Which of the following most accurately describes society's allocation of resources to the production of goods with external costs or external benefits, respectively?

A) Over-allocation; under allocation.

B) Under-allocation; over-allocation.

C) Over-allocation; over-allocation.

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External costs are costs associated with the production of goods which are not entirely borne by producers. The industrial pollution of fishing waters decreases the yield to the fishing industry. However, the lost revenue to the fishing industry is not considered a cost to the firms generating the pollution. The result is an over-allocation of resources to the production of goods made by the firms generating the pollution.

External benefits refer to benefits received by those other than the buyers of a good. Scenic gardens and fountains built by private enterprises for their own interests are examples of goods with external benefits. Since the marginal benefit to society is greater than that of the marginal cost to the producer, less than the efficient quantity is produced.

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Which of the following relationships most accurately describes the inefficiency resulting form government imposed production quotas?

A) Marginal benefit exceeds marginal cost leading to underproduction.

B) Marginal cost exceeds marginal benefit leading to underproduction.

C) Marginal benefit exceeds marginal cost leading to overproduction.

Government imposed quotas restrict production to a level below that which would occur if marginal benefit equals marginal cost. This restricted output quantity is less than the equilibrium quantity, so marginal benefit exceeds marginal cost.

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Which of the following is least likely to be considered an obstacle to the efficient allocation of an economy’s resources?

A) Rent controls.

B) Changes in consumer tastes.

C) Taxes.

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Price controls and taxes are obstacles to allocative efficiency. Rent controls and minimum wages are examples of price controls. As opposed to being obstacles to the efficient allocation of resources, changes in consumer tastes lead to the reallocation of society’s resources, producing a different mix of goods or services that provide increased benefits.

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Which of the following is least likely to be an obstacle to the efficient allocation of resources?

A) Monopoly.

B) Technological advancement.

C) Price controls.

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As opposed to being an obstacle to allocative efficiency, technological advancement requires a constant reallocation of an economy’s resources to more efficient uses