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Consider a market with a positive externality in consumption
Consider a market with a positive externality in consumption. The market will tend to _ the good because the market participants tend to ignore the _ of their decision.
A) under-produce; marginal social benefit (B) overproduce; marginal social cost (C) under-produce; marginal private cost ( D) under-produce; marginal private benefit (E.) overproduce; marginal social benefit
Similarly, if the price a firm charges in a perfectly competitive market is greater than its average total cost, then the firm is earning an economic profit _ zero.
(A) equal to (B) greater than (C) less than (D)
The question cannot be answered with the information provided.
Expert Solution
The best answer to the first question is (E) The market will tend to overproduce the good because the market participants tend to ignore the marginal social benefit of their deciison.
The correct answer to the second question is (B). Similarly, if the price a firm charges in a perfectly competitive market is greater than its average total cost, then the firm is earning an economic profit greater than zero. Because it is a perfectly competitive market, the economic profit will attract more competitors and the economic profit will disappear over time.
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