AP Microeconomics 6.1 Socially Efficient and Inefficient Market Outcomes Questions

Review efficient output at MSB equals MSC, maximum total surplus, inefficient market quantities, deadweight loss, and whether policy benefits exceed intervention costs.

Exam points

identify socially efficient output where MSB equals MSC and total economic surplus is maximized
connect P = MC and zero deadweight loss to allocative efficiency when effects are internalized
use marginal or total cost-benefit data to choose the socially optimal activity level
diagnose underproduction or overproduction by comparing market and efficient quantities
identify, shade or calculate deadweight loss created by a non-efficient quantity

Covered syllabus points

POL-2.A—a. Define social efficiency. b. Explain (using graphs where appropriate) why resource allocation in perfectly competitive markets…POL-2.B—Explain (using graphs where appropriate) how private incentives can lead to actions by rational agents that are socially…POL-2.C—a. Explain equilibrium allocations in imperfect markets relative to efficient allocations (using graphs where appropriate) and why…

[Maximum number: 1]

Voda Reservoir is a profit-maximizing firm and the only producer of bottled water in a country.

Currently, Voda Reservoir is earning negative economic profit.

Suppose the government requires Voda Reservoir to produce the socially optimal quantity of bottled water. On your graph in part A, show the socially optimal quantity of bottled water, labeled $\mathrm{Q}_{\mathrm{S}}$ .

The graph from part A must show the socially optimal quantity of bottled water, labeled $\mathrm{Q}_{\mathrm{S}}$ , from the intersection of the D and MC curves. Figure for Answer to Question 1 — AP Microeconomics

[Maximum number: 1]

Figure for Question 2 — AP Microeconomics

The diagram provided illustrates the marginal pri vate benefit (MPB), marginal social benefit (MSB), marginal private cost (MPC), and marginal social cost (MSC) measured in dollars for a competitive market. Assume that the goal of the government is to in crease efficiency in the market. The cost of a govern ment intervention that increases market output from $Q_{1}$ to $Q_{2}$ is $\$ 1.2$ million. The intervention will defi nitely improve market efficiency if the area of

A is greater than $\$ 1.2$ million

B is less than $\$ 1.2$ million

C is less than $\$ 1.2$ million

A+B is greater than or equal to $\$ 1.2$ million

B+C is greater than or equal to $\$ 1.2$ million

[Maximum number: 2]

NCHart is a corporation that has developed and patented a new drug to treat heart disease. There are no substitutes for this drug, giving NCHart a monopoly.

(a)

Instead of maximizing profit, suppose NCHart considers providing the new drug to as many patients as possible as long as it can generate enough revenue to cover its total costs.

[ 2 ]

(i)

On your graph from part (a), show the quantity that is consistent with this goal, labeled $\mathrm{Q}_{\mathrm{Z}}$ .

[ 1 ]

On your graph from part (a), show the quantity that is consistent with the goal of NCHart

generating enough revenue to cover its total costs labeled as $\mathrm{Q}_{\mathrm{z}}$ .

(ii)

At $\mathrm{Q}_{\mathrm{Z}}$ from part (c)(i), is there a deadweight loss? Explain.

[ 1 ]

State there is a deadweight loss at $\mathrm{Q}_{\mathrm{z}}$ and explain that P (or D)<MC, as shown.

1 point

Note: Deadweight loss will exist at $\mathrm{Q}_{\mathrm{z}}$ if the demand is drawn such that the quantity at

which D=ATC is less than the quantity at which D=MC, because P (or D)>MC.

Note: Deadweight loss will NOT exist at $\mathrm{Q}_{\mathrm{z}}$ if the demand is drawn such that the quantity

at which D=ATC is equal to the quantity at which D=MC, because P (or D )=MC.

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Covered syllabus points

Question 1

Question 2

Question 3

Question (a)

Question (i)

Question (ii)