Assignment

1) What condition of competitive equilibrium in markets implies that resources are being devoted to their highest valued uses?

2) Why is the unrestricted entry of new firms to all markets necessary to assure the efficient allocation of resources in the long run?

3) "If societies' scarce resources were allocated efficiently within and across branches of production, it would not be possible to rearrange those resources in such a way as to make anybody better off than they currently are." Agree or disagree and explain.

4) Demand conditions for two goods are pictured in the graph below. Assuming that in the long run resources can move freely between production of the two goods, that either good can be produced at a minimum average cost of $20 per unit and that both goods are produced under conditions of perfect competition. Show the net loss in consumers' welfare in long run equilibrium if a government agency imposed a tax of $5/unit on A and gave producers of B a subsidy of $5/unit.

5) Explain why different distributions of income in an economy might well imply different "efficient" patterns of resource allocation.

6) In what sense do monopolistic-competitive markets lead to an inefficient allocation of resources? Do you think consumers' economic welfare would be increased if there were fewer competitors in monopolistic competitive markets? Explain.

7) Discuss the relationship of advertising to economic efficiency. Does advertising increase or decrease economic efficiency? (Hint: you may wish to distinguish the role of advertising expenditures in monopolistic competitive markets from the role of advertising in oligopolistic markets.)

8) What is the justification for regulating the behavior of a "natural" monopoly?

9) Do you think Microsoft is an example of "natural monopoly" in computer operating systems? How does your answer to this question affect whether or not you believe the Government should have forced Microsoft to "break-up" into two competing companies as it originally intended to do? How has Microsoft's behavior differed from that of a traditional unregulated monopolist?