ECONOMICS PAPER 3 QUESTIONS AND
ANSWERS 100% ACCURATE!(GRADED
A+)
, Explain the meaning of allocative efficiency and its implication for social/community
surplus - ANSWER - Allocative efficiency means that resources are allocated in the best
possible way and as a result just the right amount of the good is
produced from society's point of view so that social/community surplus (the
sum of consumer and producer surplus) is maximized.
Implications of allocative efficiency - ANSWER - This occurs at the output level at which
the cost of producing an additional unit of output (MC)= benefit consumer gain from
consuming that unit (AR).
- That benefit is given by the price consumers are willing to pay for that unit
Explicit costs - ANSWER
Profit maximising level of output - ANSWER At that level of output, MR = MC
Productive efficiency - ANSWER An explanation that it exists if production takes place
at minimum AC or where MC = AC.
Explain why a profit maximising firm with monopoly power will never choose to operate
on the inelastic portion of its average revenue curve. - ANSWER - For explaining that if
demand (AR) is inelastic and price rises then TR will rise while, since less is produced,
it follows that TC will fall.
- Hence decreasing output would increase profits. Therefore profits cannot be
maximized while operating on the inelastic portion of the demand curve.
OR
- Profit maximization requires that MR=MC.
- Since MR is negative in the inelastic region of a demand curve (lies below the
horizontal axis) but MC cannot be negative it follows that MR and MC can be equated
only in the elastic region.
ANSWERS 100% ACCURATE!(GRADED
A+)
, Explain the meaning of allocative efficiency and its implication for social/community
surplus - ANSWER - Allocative efficiency means that resources are allocated in the best
possible way and as a result just the right amount of the good is
produced from society's point of view so that social/community surplus (the
sum of consumer and producer surplus) is maximized.
Implications of allocative efficiency - ANSWER - This occurs at the output level at which
the cost of producing an additional unit of output (MC)= benefit consumer gain from
consuming that unit (AR).
- That benefit is given by the price consumers are willing to pay for that unit
Explicit costs - ANSWER
Profit maximising level of output - ANSWER At that level of output, MR = MC
Productive efficiency - ANSWER An explanation that it exists if production takes place
at minimum AC or where MC = AC.
Explain why a profit maximising firm with monopoly power will never choose to operate
on the inelastic portion of its average revenue curve. - ANSWER - For explaining that if
demand (AR) is inelastic and price rises then TR will rise while, since less is produced,
it follows that TC will fall.
- Hence decreasing output would increase profits. Therefore profits cannot be
maximized while operating on the inelastic portion of the demand curve.
OR
- Profit maximization requires that MR=MC.
- Since MR is negative in the inelastic region of a demand curve (lies below the
horizontal axis) but MC cannot be negative it follows that MR and MC can be equated
only in the elastic region.
