Question

Hi,

When the PPF gets smaller compared to the original one, how does the marginal cost and marginal benefit look like? Can you please draw and illustrate it a little bit clearly?

Thanks

(Question 15 Downtown Music)

The misssing word is: have changed the way...

at thc malglhal cost of food in Yucatan 14. The table describes the preferences in Yucatan. Sunscreen litres per month) Willingness to pay (kilograms of food per litre 25 75 125 2 a. What is the marginal benefit from sunscreen and how is it measured? b. Use the table in Problem 11. What does Yucatan produce to achieve allocative efficiency? 15. Downtown Music Stores Squeezed out of Business Music retailing is changing: Sony Music and Amazon are selling online, discount stores are selling at low prices, and downtown music retailers are all struggling. Source: The Economist, January 20, 2007 a. Draw the PPF curves for downtown music retailers and online music retailers before and after the Internet became available.

Answer 1

ANS 14

Ans (a) The marginal benefit of any good or service is the additional satisfaction or utility, a consumer receives from the consumption of one additional unit of a good or service. Marginal benefit is maximized at the highest price the consumer is willing to pay for that additional unit. In most cases, Marginal benefit declines as further consumption increases, under the Law of Diminishing Returns.

In order to calculate the Marginal Utility, the difference in total utility is divided by the difference in units.

Thus, we can say that Marginal Utility = Difference in Total Utility /Difference in units

= (50 Litres)/(1kg/litre )= 50 Litres /kg is the Marginal utility.

Ans (b) Allocative efficiency occurs when there is an optimal distribution of goods and services taking into account consumer's preferences. It is an output level where the price equals the Marginal Cost (MC ) of production. It is the state of the economy in which production represents consumer preferences, in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing.

In the single price model, at the point of allocative efficiency price is equal to marginal cost. At this point, the social surplus is maximized with no deadweight loss (the latter being the value the society puts on that level of output produced minus the value of resources used to achieve that level). Allocative efficiency is the main tool of welfare analysis to measure the impact of markets and public policy upon society and subgroups being made better or worse off.

ANS 15

Ans (a) A Production Possibility frontier (PPF) or Production Possibility Curve (PPC) is a curve which shows various combinations of a set of two goods which can be produced with the given resources and technology where the given resources are fully and efficiently utilized per unit time. One good can only be produced by diverting resources from other goods, and so by producing less of them. This tradeoff is usually considered for an economy but also applies to each individual, household, and economic organization.

The Production Possibility Frontier (PPF) is the border between those combinations of goods and services that can be produced and those that cannot. It is the method to analyze the effective outcomes/usage of two goods.

Graphical representation of PPF curves for online music retailers before and after music availability is as follows:

Ans (b) With the technology of the internet, other goods and services become cheaper to produce, so more other goods and services must be given up to obtain a given quantity of Main Street music retailing services. So the expansion of the internet increases the marginal cost of the main street music retailing services. The marginal cost of the main street music retailing services shifts leftwards, However, the marginal cost and marginal benefit curves for downtown music retailers and online music retailers -before and after the internet became available can be drawn in the following manner:-

Ans (c) Easier access to the internet has decreased the cost of downloading online music and the marginal cost of online music retailers has decreased. The marginal benefit of listening to music has not changed. The result is an increase in online music retailers and a decrease in Main street music retailers.