1. What is X-inefficiency? What are the two potential causes of X-inefficiency?
ID: 1179253 • Letter: 1
Question
1.
What is X-inefficiency? What are the two potential causes of X-inefficiency? Why monopolies may be particularly prone to such inefficiency? Explain.
2.
The owner of Tie-Dyed T-shirts, a perfectly competitive firm, has hired you to give him some economic advice. He has told you that the market price for his shirts is $20 and that he is currently producing 200 shirts at a VC of 3,000, an ATC of $25 and a MC of $20. Should he continue producing 200 shirts now or should he shut down? Why? If market conditions do not change should he stay in the business or exit the market in the long run? Why?
3.
The market demand is given by Q=1000-40P and TC(Q)=5Q.
Explanation / Answer
1.X-inefficiencies is the difference between efficient behavior of businesses assumed or implied by economic theory and their observed behavior in practice. It occurs when technical-efficiency is not being achieved due to a lack of competitive pressure.
A monopoly is a pricemaker in that its choice of output level affects the price paid by consumers. Consequently, a monopoly tends to price at a point where price is greater than long-run average costs. X-inefficiency, however tends to increase average costs causing further divergence from the economically efficient outcome. The sources of X-inefficiency have been ascribed to things such as overinvestment and empirebuilding by managers, lack of motivation stemming from a lack of competition, and pressure by laborunions to pay above-market wages.
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