Managerial Economics: Allocative and Productive Efficiency, Monopoly vs Perfect Competition, Affirmative Action

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MANAGERIAL ECONOMICS
PROBLEM SET 4

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Contents
Question 1..................................................................................................................................3
Question 2..................................................................................................................................3
Question 3..................................................................................................................................3
Question 4..................................................................................................................................5
Reference....................................................................................................................................7

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Question 1
The allocative efficiency is that point of the market where the resources are effectively used
for the production of the most needed goods of the society. Efficient allocation of the
resources as per the demand can increase social welfare as well.
Now, P= MC is the point where the allocative efficiency occurs as the price is the measure of
the relative worth of a product compared to the other product in a different market (Kreps,
2019). That means the marginal benefits that are extracted by the consumers of the market.
Marginal cost (MC) on the other hand measures the relative worth of the other good that the
economy could have produced if the resources were used for the production of that good. In
other words, while price measures the benefit to be enjoyed by the society, the marginal cost
measures the opportunity cost that is given up by society for the production of that good.
Under the perfect competition, automatic adjustment is possible that brings the system at an
equilibrium where P=MC (Pindyck & Rubinfeld, 2015). At this point, the marginal benefit of
the society becomes equal to the marginal cost and hence the resources are used as per the
needs of the society increasing the welfare of the society, therefore, P=MC indicate allocative
efficiency.
Question 2
The productive efficiency means the process of the product that uses the least cost techniques
for the goods and the services needed by the customers of the market. In this case, the
production unit is combining and using the resources in such a way that the output which is
produced uses the least-cost combination of the resources. Iossa & Martimort (2015) stated
that, at the perfectly competitive market, the firms must use the least cost techniques for
production in the long-run when a new firm enters the market. In failing to do so, the firm
will not be able to earn a normal profit from the market and hence eventually shut down. The
cost of production is lowest at the lowest point of the ATC curve that depends on the output
being produced by the firms in the market.
Question 3
The total surplus acquired by society as a whole determines the efficiency of the market
setting. There are a lot of differences between the perfectly competitive market and the
monopoly (Fine, 2016). In the monopoly market, the seller enjoys huge power over the price
of the market and hence sets the price at a higher level than that of a perfectly competitive