Efficiencies

Question 1

Productive efficiency

Answer 1

When the firm operates at the minimum long run average cost and producing the maximum output possible
- operate at the bottom of the LRAC (minimum efficiency scale)

Question 2

Allocative efficiency

Answer 2

When consumers value the good as much as it costs to produce it

Question 3

What is the condition for allocative efficiency?

Answer 3

When consumers value the good as much as it costs to produce it
- price = marginal cost

Question 4

Why is P > MC not allocatively efficient?

Answer 4

Consumers value the good more than it costs to produce it
- this means that firms should produce more of the good to meet needs
- firms allocating too little resources to the production of the good

Question 5

Why is P < MC not allocatively efficient?

Answer 5

Consumers value the good less than it costs to produce it
- this means that firms should produce less of the good to meet needs
- firms allocating too many resources to the production of the good

Question 6

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Dynamic efficiency

Answer 6

When the firm invests in research and development leading to new production techniques and products

Question 7

What might stop firms being incentivized to be dynamically efficient?

Answer 7

• maybe myopic and focus on profits in the short-term
• lots of pressure from shareholders to get dividends so not enough profits
• firms may be reluctant to spend a lot of money to train workers due to the fear of their worker leaving or being poached by another firm

Question 8

X-inefficiency

Answer 8

When the actual average cost is greater than the attainable average costs

Question 9

What are the forms of x inefficiency?

Answer 9

• firms workers may start to slack
• not constantly reviewing contracts
• not innovating products