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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

Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer's willingness to pay is

a. negative.

b. zero.

c. positive but less than the marginal seller's cost.

d. positive and greater than the marginal seller's cost.

To determine
The impact of producing higher than the equilibrium.

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 economic efficiency is the situation where the marginal benefit of the consumer from the last unit produced 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 consumer surplus and the producer surplus will be the maximum.

Option (c):

The economic efficiency states that the economy will be efficient when it is in equilibrium. The economic efficiency is the situation where the marginal benefit of the consumer from the last unit produced is equal to the marginal cost of the production of the unit. Beyond that equilibrium point, when the supply increases, the marginal benefit to the consumer will be less than the cost of production. Thus, the production beyond the equilibrium is inefficient because the marginal buyer's willingness to pay will be positive but less than the marginal seller's cost. Since, option 'c' explains this clearly, option 'c' is correct.

Option (a):

The economic efficiency states that the economy will be efficient when it is in equilibrium...

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