Business Economics

Running head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Student ID

1BUSINESS ECONOMICS
Table of Contents
Answer 2....................................................................................................................................2
Answer a.................................................................................................................................2
Answer b................................................................................................................................3
Answer 3....................................................................................................................................4
Answer a.................................................................................................................................4
Answer b................................................................................................................................5
Answer c.................................................................................................................................6
Answer 5....................................................................................................................................6
Answer 6....................................................................................................................................8
Answer 8..................................................................................................................................10
Answer a...............................................................................................................................10
Answer b..............................................................................................................................10
Answer c...............................................................................................................................10
Answer d..............................................................................................................................10
Answer e...............................................................................................................................10
Answer f...............................................................................................................................11
Answer g..............................................................................................................................11
Answer h..............................................................................................................................11
Answer i...............................................................................................................................11
References................................................................................................................................12

2BUSINESS ECONOMICS
Answer 2
Answer a
Allocative efficiency refers to the state of the economy where production takes place
according to preference of consumers. In economic terms allocative efficiency is achieved
when each good or service is produced till the point where marginal benefit to consumers
from last unit of the good is equal to the marginal cost of producing the last unit. Allocative
efficiency is achieved only under perfect competition. Because of zero market power of firms
in the perfectly competitive market, firms are able to charge price that equal marginal cost of
production. Because of large number of identical firms in the market selling a homogenous
good, firms cannot charge price that exceeds marginal cost (Waldman and Jensen 2016). As
price is used as a measure of marginal benefit, under perfect competition marginal benefit to
society always equals marginal cost achieving allocative efficiency. Perfectly competitive
market is therefore considered as a benchmark of allocative efficiency.
Figure 1: Long run equilibrium and allocative efficiency under perfect competition

3BUSINESS ECONOMICS
Answer b
Monopolistically competitive firms though have some similarities with perfect
competition, the market fails to achieve allocative efficiency. Unlike perfect competition
monopolistically competitive firms do not sell identical products rather they differentiate
their product. This allows monopolistically competitive firms some degree of market power.
Firms here maximize profit by equating marginal revenue and marginal cost. The demand
curve for a monopolistically competitive market slopes downward (Belleflamme and Peitz
2015). Market price thus is greater than marginal cost as shown in the figure below.
Corresponding to long run equilibrium point, society suffers a net welfare loss (loss in
consumer and producer surplus) making the production allocative inefficient.
Figure 2: Long run equilibrium and allocative inefficiency under monopolistic
competition