Question

1.While defining the concept of market efficiency, briefly describe the theoretical basis of measuring efficiency under a perfectly competitive market.

2.If the real wage rate (adjusted for inflation) declines for the jobs for high school graduates, would the true opportunity cost of attending college or spending for higher education decline? Give an example.

Answer both questions carefully and I will give you a thumps up

Answer 1

1.

Market efficiency refers to the degree to which a market is open, in the sense that infomation about prices is available to all participants equally. Also prices completely reflect the true value of each and every product at any instant.

Under a perfectly competitive market, eficiency is measured by these following methods

a. Productive efficiency: Productive efficiency means that market is producing goods and servies in an efficient manner, meaning thereby there is no waste. As free entry and free exit exists in PC market, and in the long run goods are produced at lowest possible cost thus prices are lower. The same can be inferred from the graphical analysis where goods are sold at lowest AC (average cost curve).

b. Allocative efficiency: In a perfectly competitive market, price is equal to the marginal cost of production. This ensure that maximum social benefit is accured to the society in this case. This means that socially optimum points at which gain to society is maximised are choosed from the production possibility curve. Also the deadweight loss is zero ensuring that products are sold at the social cost of production.

2. If the real wage rate (adjusted for inflation) declines for the jobs for high school graduates, then the true opportunity cost of attending college or spending for higher education decline. True opprotunity cost is the total cost of all things one had to give up for that activity. For example, considering that tution fee and other expanses remain same and wages decreases than a student will not be inclined to invest in college education, rather will invest money in any other activity like setting up a business or doing some other degree or course.