a.) Perfect competition is used to evaluate allocative efficiency in market structure. It may be considered unrealistic, but the characteristics of perfect competition still ensure efficiency. Demonstrating perfection is in fact the main purpose of perfect competition, it helps to evaluate the physical structure of the world market which certainly does not reach this perfection and illustrates the best of all possible worlds of resource allocation. With perfect competition, efficiency is achieved because the price is equal to the marginal cost. The value of the goods produced is indicated by the price and therefore production generates satisfaction. The opportunity cost of unproduced goods is indicated by the marginal cost and therefore by the consequent loss of satisfaction resulting from giving up production. Overall satisfaction cannot be added by decreasing or increasing output because the price (satisfaction gained) equals the marginal cost (satisfaction forgone). If there is no equality between price and marginal cost then we can increase satisfaction by changing production. Allocative efficiency: when the quantity of output produced reaches the maximum possible level of total well-being. When MB=MC. When P=MC.B.) Monopolistically competitive firms fail to achieve allocative efficiency because the price is greater than marginal cost. One of the reasons for its inefficiency is also because it charges higher prices and produces lower output than perfect competition. As can be seen from the graph, all businesses want to achieve maximum profit. Allocative efficiency is the sweet spot, where marginal cost equals marginal revenue (Q3). All firms would like to obtain maximum profit where marginal cost equals marginal revenue (Q1). ...... middle of the sheet ...... proportional change in demand divided by the proportional change in income) Elastic because the value is greater than 1. Complementary good because the demand for the good decreases as the price of the good increases good other increases in good. Answer 9 (a) The firm will produce 70 units to maximize profits at a price of $8 per unit. (b) The firm's average cost of production will be $6 per output. (c) The firm makes $2*70 = $140 profit. (d) The firm will produce 50 units to maximize its profit at a price of $5 per unit. (e) Profit will be $0. (f) The firm will produce 40 units to maximize profits at a price of $4 per unit. (g) The firm will suffer a loss of $1.50*40 = $60. (h) The firm will close below the price of $3.50 (where P=AVC).(i ) In the long run , the market will close below the price of $5 (where P=AC)..