A community\'s marginal utility and total cost schedules for wooden chairs are a

Question

A community's marginal utility and total cost schedules for wooden chairs are as follows (all units in thousands): a) What is the efficient level of output? b) What are the supply and demand schedules for chairs, and the equilibrium output and price? C) Explain why the free market does or does not achieve the efficient level of output. 2. Suppose that in Problem 1 the government imposed a) a price ceiling of $4. b) a price floor of $7. What quantity of chairs would be sold at these prices' Explain why these quantities either would or would not be efficient. 3. There is equilibrium in the purely competitive market for oranges, and the optimal amount of oranges is being produced. Explain if and how the optimal amount of oranges will change if the following events occur: a) New fertilizers increase the yiedls of orange trees. b) Frost destroys part of the orange crop. c) Frost destroys port of the grapefruit crop. The resulting increase in the price of grape fronts raises the demaid for oranges d) People get tired of oranges. 4 When the events in Problem 3 occur, how does the market system signal that something has changed, and how does it provide incentives for people to behave in constructive ways?

Explanation / Answer

I) Efficient level of outputhout is one where MC is minimum. There is no clear cut level in this case as MC is increasing throgh out.

II) Marginal utility curve is demand curve of the firm and marginal cost curve is supply curve of the firm.

III) Where demand and supply are equal i.e. MU is equal to MC, the market is in equilibrium and hence market is in equilibrium at 5 units where Mu = MC = 6 units.

2. If government imposed a price ceiling of $ 4, then supply will be 3 units (where MC = 4 units) while marginal utility will be 7 units and hence marginal utility is more than marginal cost. therefore, demand will be more than supply.

II. If government imposed a price floor of $7 per unit then supply will be 6 units and demand will be 5 units and hence there will be excess demand.

Chairs MU TC MC 1 10 2 2 2 9 5 3 3 8 9 4 4 7 14 5 5 6 20 6 6 5 27 7 7 4 35 8 8 3 44 9 9 2 54 10

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