Determine consumers surplus

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1. Interferences such as rent controls and farm price supports reduce the efficiency of markets. In terms of the balance of Qd and Qs, how/why do they do this? Draw a supply & demand graph (or graphs) to illustrate your answer.

2. What is consumers surplus? Why does it exist? Why is consumers surplus at a maximum when the consumer purchases the quantity of a good at which P = MU.

3. Describe carefully what "input substitution" means in terms of different possible combinations of inputs capable of producing a given quantity of output. How does the rule MPPa/PRICEa = MPPb/PRICEb serve to guide a producer to the "correct" input combination?

4. In terms of the relationship between price and marginal revenue, what does it mean to say that the perfectly competitive firm is a "price taker"? Why is the profit-maximizing "price taking" perfectly competitive firm the ideal or standard of economic efficiency?

Reference no: EM1369947

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