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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

An efficient allocation of resources maximizes

a. consumer surplus.

b. producer surplus.

c. consumer surplus plus producer surplus.

d. consumer surplus minus producer surplus.

To determine
The impact of efficient allocation of resources.

Explanation

The equilibrium price is determined by the demand for the coat and the supply of coat normally. The consumer surplus can be explained as the difference between the highest price that the consumer is willing to pay and the actual price that the consumer pays. The difference between these two prices is known as the surplus to the consumer. The producer surplus is the difference between the minimum willing to accept price by the seller and the actual price that the seller receives for the commodity.

The efficient allocation of the resources brings economic efficiency in the economy where the sum of the consumer surplus and the producer surplus will be at its maximum bringing the economic surplus into its maximum. The efficient allocation means that the marginal benefit of the consumer from the last unit consumed is equal to the marginal cost of the production of the unit. This efficient allocation can be made only at the equilibrium price where the sum of consumer surplus and the producer surplus will be the maximum.

Option (c):

The efficient allocation is the allocation of the resources where the consumer surplus as well as the producer surplus will be at its maximum. The economic efficiency is a situation where no one can be better off without hurting the other. In this case, the economic efficiency is the situation where the marginal benefit of the consumer from the last unit consumed is equal to the marginal cost of the production of the unit. This means that both of them will be the same and neither the consumer nor the producer can be better off. The sum of the consumer surplus and the producer surplus which is the economic surplus and it will be at its maximum. Thus, option 'c' is correct.

Option (a):

The efficient allocation is the allocation of the resources where the consumer surplus as well as the producer surplus will be at its maximum...

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