In a market economy, will units of a good be produced and purchased if consumers

Question

In a market economy, will units of a good be produced and purchased if consumers value them more than their cost of production? Explain. If the production cost per unit of a good exceeds the value derived by consumers, will the good continue to be produced and consumed? Why or why not? b)

Which of the folowing statements support the claim that incentives matter?

1. When income transfers to the able­bodied poor increase, the recipients will have less incentive to work.

2. An increase in the fines associated with downloading music and videos protected by copyright laws reduces the number of people engaging in this activity.

3. An increase in the number of people downloading music and videos negatively impacts the commercial production of music and videos.

Explanation / Answer

Yes, units of goods will be produced and purchased if consumers value them more than their cost of production. Both producers and consumners are in win win situation. Due to higher willingness to pay by consumers, producers will produce more to earn profit. And consumers are happy getting the product.

If the production cost per unit of a good exceeds the value derived by consumers, the good will not continue to be produced and consumed. Even if it is produced, consumers will not buy it and hence no revenue to producer. Consumers will look for the substitutes instead of buying present product.

1. This statement support the claim that incentives matter. When Government is taking care of able­bodied poor, their incentive to work for money falls. They think if they are getting money without working, why should they work.

2. This statement support the claim that incentives matter. One always try to extract the most from free public goods. If a nominal fee or fine is imposed, manyfree riders will choose not to have the product. LIkewise an increase in the fines associated with downloading music and videos protected by copyright laws reduces the number of people engaging in this activity.

3. This statement does not support the claim that incentives matter. As an increase in the number of people downloading music and videos increases the commercial production of music and videos.

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